Understanding How to Calculate Adjusted Net Income
Adjusted net income is a key concept in UK taxation. It’s used for various purposes, such as determining the availability of certain tax reliefs and the applicability of the High-Income Child Benefit Charge. Understanding how to calculate it is essential for accurate tax planning and compliance.
In this article, we will explain the process of calculating adjusted net income with examples, and provide useful tips for managing it efficiently.
What is Adjusted Net Income?
Adjusted net income, as defined by the HM Revenue & Customs (HMRC), is your total taxable income, including salary, dividends, rental income, and benefits, minus certain tax reliefs. The official HMRC guide to adjusted net income can be found here.
Step-by-step guide to calculating Adjusted Net Income
Calculating adjusted net income involves several steps, which we’ve outlined below:
Step 1: Calculate Total Income
First, you need to add up all your sources of income. These could include:
- Employment income
- Benefits-in-kind
- Rental income
- Pension income
- Dividend income
- Savings interest
Step 2: Deduct Pension Contributions
Next, deduct any pension contributions that were made net of tax relief at source.
Step 3: Deduct Gift Aid Donations
You can also reduce your total income by the ‘grossed up’ amount of any Gift Aid donations. To get the gross amount, you multiply the amount you donated by 125% (as of 2025, according to HMRC).
Step 4: Deduct Trading Losses
If you have any trading losses, these can also be deducted from your total income.
Final Calculation
After carrying out these deductions, you are left with your adjusted net income.
Example of Adjusted Net Income Calculation
Let’s illustrate this with an example:
- Total income: £100,000
- Pension contributions (net of tax relief at source): £10,000
- Gift Aid donations (grossed up): £2,000
- Trading losses: £3,000
Adjusted net income = Total income – Pension contributions – Gift Aid donations – Trading losses = £100,000 – £10,000 – £2,000 – £3,000 = £85,000
Tips for Managing Adjusted Net Income
Understanding your adjusted net income is the first step towards effective tax planning. Here are some tips to manage it:
- Consider making additional pension contributions or Gift Aid donations to reduce adjusted net income if you’re close to a threshold.
- Remember to carry forward any unused pension allowances from the previous three years.
- Seek professional advice if your income is complex, or if you’re unsure about the rules and regulations.
Conclusion
Calculating adjusted net income can seem complex, but it’s essential for accurate tax planning. Remember, it’s not just about knowing the numbers; it’s also about understanding how your income and deductions affect your overall tax position.
