Adjusted net income is your total taxable income for the tax year, less certain reliefs, less the grossed up value of Gift Aid donations and relief at source pension contributions. It is the figure HMRC uses to decide whether your Personal Allowance is tapered above £100,000 and whether you pay the High Income Child Benefit Charge above £60,000. Because Gift Aid and pension contributions come off it, they are the two main ways to bring it down legitimately.

Where does the definition of adjusted net income come from?

The definition is in section 58 of the Income Tax Act 2007. It applies to the Personal Allowance rules in Chapter 2 of Part 3 of that Act and to the Married Couple’s Allowance rules in Chapter 3. The High Income Child Benefit Charge borrows exactly the same definition through section 681H of the Income Tax (Earnings and Pensions) Act 2003.

The same figure drives several other tests:

  • Personal Allowance taper: the allowance starts to reduce once adjusted net income exceeds £100,000 (section 35(2)).
  • High Income Child Benefit Charge: the charge starts once adjusted net income exceeds £60,000 (section 681C).
  • Married Couple’s Allowance: for 2026 to 2027 the higher amount is reduced where adjusted net income exceeds £39,200 (sections 45(4) and 46(4)). See Married Couple’s Allowance.
  • Tax Free Childcare: you cannot get it if you or your partner expect adjusted net income over £100,000 for the current tax year.

Do not confuse it with the “threshold income” and “adjusted income” used for the tapered pension annual allowance. Those are separate calculations with their own rules, so a figure worked out for one test cannot simply be reused for another.

How do you calculate adjusted net income step by step?

Section 58 starts from “net income”, a term defined in the main income tax calculation in section 23 of the Income Tax Act 2007. The four steps are:

  1. Step 1, net income. Add up all income charged to tax for the year: earnings and taxable benefits, self employed profits, most pensions including the State Pension, savings interest, dividends, rental profits, trust income and taxable foreign income. That total is “total income” under Step 1 of section 23. Then deduct the reliefs listed in section 24, such as trade loss relief against general income, property loss relief, qualifying loan interest and pension contributions paid without any tax relief that you claim relief on yourself. The result is net income.
  2. Step 2, Gift Aid. Deduct the grossed up amount of Gift Aid donations made in the year, meaning what you paid plus tax at the basic rate. HMRC’s guidance puts it simply: for every £1 donated, take £1.25 off.
  3. Step 3, relief at source pension contributions. Deduct the gross amount of contributions paid in the year to a scheme where the provider claims basic rate relief and adds it to your pot. Again every £1 you pay counts as £1.25.
  4. Step 4, trade union and police organisation payments. Add back any relief given in Step 1 under sections 457 or 458 for the part of a subscription that pays for superannuation, life insurance or funeral benefits.

No personal allowances are deducted. Adjusted net income is measured before the Personal Allowance, Blind Person’s Allowance or any transferred allowance.

How do different kinds of pension contribution reduce it?

Every type of personal pension saving reduces adjusted net income, but at different points in the calculation. Getting the route wrong is the most common error.

How you contribute Effect on adjusted net income
Workplace scheme that takes contributions from pay before Income Tax is deducted Taxable pay is already lower, so the saving is built into Step 1. Nothing further is deducted.
Salary sacrifice Your contract reduces your entitlement to cash pay, so the amount given up never forms part of your earnings. See salary sacrifice schemes.
Personal or stakeholder pension, or a relief at source workplace scheme The gross contribution, being what you paid plus the basic rate relief added by the provider, is deducted at Step 3.
Scheme not set up for automatic relief, where you claim relief yourself Deducted at Step 1 as a relief in arriving at net income.

Watch for double counting: a contribution already taken from pay before tax shows up as lower pay on the P60 and must not be deducted again at Step 3. For a wider look at pension relief for directors and the self employed, see pension contributions and tax relief for business owners.

Higher rate relief on Gift Aid and relief at source contributions is a separate mechanism. Section 10(6) of the Income Tax Act 2007 points to the extension of the basic rate limit under section 414(2) for Gift Aid and section 192(4) of the Finance Act 2004 for pension contributions. A higher rate taxpayer gets that band extension and the reduction in adjusted net income, not one or the other.

How does adjusted net income affect the Personal Allowance?

For 2026 to 2027 the Personal Allowance is £12,570. Section 35(2) reduces it by half of the amount by which adjusted net income exceeds £100,000, so £1 of allowance is lost for every £2 of income over the limit, and it can fall to nothing. The mechanics, including the effective marginal rate in the taper band, are covered in Personal Allowance tapering.

Illustration only. Priya earns a salary of £110,000 in 2026 to 2027 and has no other income. She pays £8,000 into a personal pension, which the provider grosses up to £10,000, and gives £800 to charity under Gift Aid, which grosses up to £1,000.

  • Net income: £110,000.
  • Step 2, less grossed up Gift Aid of £1,000: £109,000.
  • Step 3, less gross pension contribution of £10,000: £99,000.

Her adjusted net income is £99,000, so she keeps the full £12,570 allowance. Without the pension contribution and donation her adjusted net income would be £110,000 and her allowance would fall by £5,000 to £7,570.

How does it affect the High Income Child Benefit Charge?

For 2024 to 2025 onwards the charge applies where your adjusted net income is over £60,000. Under section 681C the charge is 1% of the Child Benefit received for every £200 of adjusted net income above £60,000, with the percentage rounded down to a whole number, so all of it is repaid once income passes £80,000. For 2023 to 2024 and earlier the threshold was £50,000 and the rate was 1% for every £100.

Each partner’s adjusted net income is tested separately; household income is never added together. If both partners are over the threshold, the one with the higher adjusted net income pays. “Partner” includes someone you live with as if married, not only a spouse or civil partner. More detail is in High Income Child Benefit Charge.

Illustration only. Tom has adjusted net income of £70,000 and his partner claims Child Benefit. His charge is 50% of the benefit, because £10,000 over the threshold divided by £200 gives 50. If he pays £4,000 into a personal pension, the gross contribution of £5,000 brings his adjusted net income to £65,000 and the charge falls to 25%.

Can you reduce adjusted net income after the tax year has ended?

Only in limited ways. Pension contributions count in the tax year in which they are paid, because Step 3 refers to contributions “paid in the tax year”. A contribution paid on 10 April falls into the new tax year.

Gift Aid is more flexible. Section 426 of the Income Tax Act 2007 lets you elect to treat a donation as made in the previous tax year. The election must be made on or before the date you file the return for that previous year and no later than its normal Self Assessment filing date, and you must have paid enough tax in that year to cover the grossed up gifts. A donation made in January 2027 can therefore reduce adjusted net income for 2025 to 2026, provided the 2025 to 2026 return has not already been filed.

A claim for trade loss relief against general income under section 64 also reduces net income for the year in which the loss is set off, which feeds straight through to adjusted net income.

What mistakes do people make with adjusted net income?

  • Leaving out savings and dividends. HMRC’s guidance is explicit that adjusted net income includes savings interest and dividends. Interest covered by the Personal Savings Allowance and dividends within the dividend allowance are still taxable income charged at a 0% rate, so they still count. How those layers sit on top of other income is explained in how savings and dividend income stack.
  • Including income that is exempt. ISA income is exempt from Income Tax, and Premium Bond prizes are not taxed, so neither is part of adjusted net income.
  • Using the net figure for Gift Aid or relief at source pensions instead of the grossed up figure.
  • Deducting a net pay or salary sacrifice contribution a second time.
  • Assuming the claimant pays the child benefit charge. It is the partner with the higher adjusted net income who is liable, even if the other partner receives the payments.
  • Relying on payslips alone. Rental profits, untaxed interest and a side business all count, and they are often what pushes someone over £60,000 or £100,000.

Current thresholds for the year are summarised in UK tax rates and thresholds for 2026 to 2027.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.