Adjusted net income is an essential figure used by HMRC when assessing your income for tax. It represents your total taxable income before personal allowances are deducted, but after taking off eligible items such as trading losses, pension contributions, and certain reliefs like Gift Aid.
The calculation
Step 1 – Work out your net income for the tax year
Calculate your net income for the year.
Start by calculating your total taxable income. This typically includes:
- salary or wages from employment
- profits from self-employment
- taxable state benefits
- most pensions, including State Pension, personal and workplace pensions
- interest on savings
- dividends
- rental income
- income from trusts
- any overseas income
Next, deduct any trading losses and any pension contributions made gross (i.e. paid without tax relief applied).
The figure you are left with is your net income. This amount is then adjusted – as we’ll see in the next step – to arrive at your adjusted net income.
Step 2 – Subtract grossed‐up Gift Aid donations
Deduct the grossed‐up value of any donations made under Gift Aid.
Step 3 – Subtract grossed‐up pension contributions (where tax relief has already been applied)
Take off the gross value of any pension contributions for which tax relief has been given. To do this, gross up the contribution at the basic rate of tax — i.e. multiply the contribution by 1.25.
Step 4 – Add back certain tax reliefs
Finally, add back any tax relief given for payments to trade unions or police organisations. Relief of up to £100 may be available on payments towards superannuation, life insurance or funeral benefit schemes; if any such deduction was made at Step 1, it should be added back at this stage.
Example
Alison receives the following income during the tax year:
- Salary: £60,000
- Rental income: £18,000
- Interest from savings: £325
- Dividends: £1,250
She incurs trading losses of £4,000 from a self-employment activity, makes net Gift Aid donations of £50, and pays £4,000 into a personal pension (net of basic rate tax). Alison’s taxable income totals £79,575 (£60,000 + £18,000 + £325 + £1,250).
After deducting her trading losses of £4,000, her net income is £75,575.
To work out her adjusted net income, she must then deduct:
- Gift Aid donations grossed up at the basic rate: £62.50 (£50 × 1.25)
- Pension contributions grossed up at the basic rate: £5,000 (£4,000 × 1.25)
This gives an adjusted net income of £70,512.50 (£75,575 − £62.50 − £5,000).
Personal allowance
Adjusted net income is a key figure in deciding whether an individual’s personal allowance is restricted or removed altogether. For 2025/26, the personal allowance remains at £12,570, but it is tapered once adjusted net income exceeds £100,000. The allowance is reduced by £1 for every £2 of income above this threshold and is fully withdrawn when adjusted net income reaches £125,140.
High Income Child Benefit Charge
The High Income Child Benefit Charge (HICBC) is designed to recoup Child Benefit from the claimant or their higher-earning partner once their adjusted net income exceeds £60,000. The charge is calculated at 1% of the Child Benefit paid for the year for every £200 of adjusted net income above £60,000. When adjusted net income reaches £80,000, the charge will equal the full amount of Child Benefit received for the year – effectively cancelling it out.
Its vital to understand what your net adjusted income will be, especially if looking at tax planning opportunities. If you’re unclear and need help with tax returns or tax planning, then get in contact with us and discuss how we can assist you. Call us on 01257827029 or email info@somosaccounting.com
