Adjusted net income is a key measure of income for tax purposes. It is total taxable income before taking account of any personal allowances and after deducting trading losses, pension contributions and certain tax reliefs, such as Gift Aid.

The calculation

Step 1

Calculate your net income for the year.

To do this you first need to work out your taxable income. This will include:

• income from employment;
• profits from self-employment;
• taxable state benefits;
• most pensions, including the state pension and personal and occupational pensions;
• interest;
• dividends;
• rental income;
• trust income; and
• any foreign income.

You then need to deduct any trading losses and payments made gross to pension schemes (i.e. without tax relief).

The result is your ‘net income’. This is ‘adjusted’ to arrive at your ‘adjusted net income’.

Step 2

Deduct the grossed up amount of any Gift Aid donations.

Step 3

Deduct the gross amount of any pension contributions in respect of which tax relief has been given. The amount of the contributions must be grossed up at the basic rate of tax (so multiply the amount of the contribution by 1.25).

Step 4

Add back any tax relief for payments to trade unions or police organisations.

Tax relief of up to £100 is available for payments in respect of superannuation, life insurance or funeral benefits. If this has been deducted in step 1, it should be added back.

Example

Alison has the following income:

• salary: £60,000;
• rental income: £18,000;
• bank interest: £325; and
• dividends: £1,250.

She also made trading losses of £4,000 from a self-employment and Gift Aid donations (net) of £50.

She also made contributions of £4,000 to a personal pension scheme net of basic rate tax.

Alison’s taxable income is £79,575 (£60,000 + £18,000 + £325 + £1,250).

Her net income is £75,575 (£79,575less trading losses of £4,000).

Her adjusted net income is £70,512.50 (net income of £75,575 less grossed-up Gift Aid donations of £62.50 (£50 x 1.25) less gross pension contributions of £5,000 (£4,000 x 1.25)).

Personal allowance

A person’s adjusted net income is used to determine whether the personal allowance is reduced or lost. The personal allowance (set at £12,570 for 2025/26) is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. It is lost entirely once adjusted net income reaches £125,140.

Common mistakes and why adjusted net income matters

Many taxpayers underestimate the importance of adjusted net income, often confusing it with taxable income or assuming it is calculated automatically without planning opportunities. One common mistake is failing to account for grossed-up pension contributions or Gift Aid donations, which can significantly reduce adjusted net income and prevent unnecessary tax charges.

Another frequent issue is overlooking how adjusted net income affects high earners and families. Crossing key thresholds such as £60,000 or £100,000 — even by a small amount — can trigger the High Income Child Benefit Charge or the tapering of the personal allowance, resulting in a disproportionately high effective tax rate. In some cases, earning an extra £1 can cost several pounds in lost allowances or clawed-back benefits.

For SMEs, company directors and business owners, adjusted net income plays a crucial role in personal tax planning alongside salary, dividends and pension strategies. Decisions such as pension funding levels, timing of bonuses, or use of salary sacrifice can materially change the final tax outcome.

Understanding adjusted net income allows individuals to take proactive steps before the tax year end, rather than reacting after a tax bill arises. With careful planning, it can help preserve allowances, reduce tax charges and improve overall tax efficiency.

High Income Child Benefit Charge

The High Income Child Benefit Charge claws back child benefit from the claimant or their higher earning partner once adjusted net income exceeds £60,000. The charge is equal to 1% of the child benefit for the year for every £200 by which adjusted net income exceeds £60,000. Once adjusted net income reaches £80,000, the charge is equal to the child benefit for the year.

If your adjusted net income is close to key thresholds such as £60,000 or £100,000, early planning can make a meaningful difference.

If you would like to review your tax position or explore legitimate ways to optimise your income, feel free to reach out to AccounTax Zone for tailored advice

Partner note: ITA 2007, s. 58.