What is adjusted net income?

The short answer

Adjusted net income (ANI) is your total taxable income for the tax year, before any Personal Allowance, less a few specific reliefs: grossed-up Gift Aid donations, grossed-up pension contributions paid under relief at source, pension contributions paid without any tax relief, and trading losses. It is not a figure on your payslip. HMRC uses it for the Personal Allowance taper above £100,000 and the High Income Child Benefit Charge above £60,000, and the same measure decides the £100,000 limit for Tax-Free Childcare and free childcare for working parents.

How HMRC works it out: four steps

HMRC's guidance sets out the calculation in four steps:

• Step 1: work out your “net income”. Add up all your taxable income: pay and taxable benefits from a job, self-employed profits, most pensions (including the State Pension), savings interest, dividends, taxable rental profits, trust income and foreign income. Count all of your savings interest and dividends, including the slices covered by the Personal Savings Allowance and the dividend allowance: those allowances are taxed at 0% but still count as income. Then take off reliefs such as trading losses and pension contributions paid gross without any tax relief.
• Step 2: take off Gift Aid donations, grossed up. For every £1 you gave under Gift Aid, take off £1.25. A £800 donation is a £1,000 deduction.
• Step 3: take off relief-at-source pension contributions, grossed up. Where your pension provider has already added basic rate relief, take off what you paid plus that relief: £1.25 for every £1. A £4,000 payment becomes a £5,000 deduction.
• Step 4: add back any relief for trade union or police organisation payments. If you took off relief of up to £100 for these at step 1, add it back.

What is not taken off:

• Salary sacrifice and net pay pension contributions. They come out of your pay before tax, so they were never in your taxable pay in the first place.
• ISA contributions. They are paid from income that has already been counted.
• Your Personal Allowance. ANI is measured before any allowance is given.

Small trading or property income covered by the £1,000 trading or property allowance is reduced by that allowance before it reaches your taxable income, so only the excess counts.

Worked example

Salary £110,000, plus £2,000 of dividends from a share portfolio, a £5,000 Gift Aid donation and £8,000 paid into a personal pension under relief at source.

• Net income: £110,000 + £2,000 = £112,000 (all of the dividends count, including the £500 covered by the dividend allowance)
• Grossed-up Gift Aid: £5,000 × 1.25 = £6,250
• Grossed-up pension contribution: £8,000 × 1.25 = £10,000
• ANI = £112,000 − £6,250 − £10,000 = £95,750

At £95,750 this person keeps their full Personal Allowance and stays clear of the 60% tax trap, because the pension contribution and the donation brought ANI below £100,000.

The thresholds ANI controls

ANI is the number HMRC tests against these limits:

• Personal Allowance taper: £100,000. Above £100,000 of ANI you lose £1 of the £12,570 allowance for every £2 of income, so the allowance is gone at £125,140. This is what produces the effective 60% marginal rate on income between those two figures (more once National Insurance is added).
• High Income Child Benefit Charge: £60,000 to £80,000. If you or your partner get Child Benefit, whoever has the higher ANI pays back 1% of it for every £200 of ANI over £60,000, so all of it goes at £80,000. Because it is based on ANI, pension contributions and Gift Aid reduce the charge.
• Tax-Free Childcare and free childcare for working parents: £100,000. If either parent expects ANI over £100,000 for the tax year, the family is not eligible for either. Tax-Free Childcare adds £2 for every £8 you pay in, up to £2,000 a year per child (£4,000 for a disabled child). It is a cliff edge, not a taper: £1 over the limit loses the lot.

Two other tests are often confused with ANI but work differently:

• Tapered annual allowance. The £60,000 pension annual allowance is reduced by £1 for every £2 of “adjusted income” over £260,000, down to £10,000, but only if “threshold income” is also over £200,000. Threshold income starts from the same net income, takes off grossed-up relief-at-source contributions, but adds back salary sacrificed for pension contributions under arrangements made after 8 July 2015 and does not take off Gift Aid. Adjusted income adds back all pension contributions, including your employer's.
• Marriage Allowance. This depends on the rate of tax you pay, not on ANI. The partner receiving the £1,260 transfer must not pay tax above the basic rate (in Scotland, above the intermediate rate), and the partner giving it must not either once the transfer is taken into account.

Reducing your ANI: a worked £101,000 example

Because ANI is measured after grossed-up pension contributions and Gift Aid, the two ways to bring it down are paying more into a pension and giving to charity under Gift Aid. Both are reliefs the tax rules provide for.

Take someone with a salary of £101,000 and no other income. Their ANI is £101,000, so they are £1,000 into the Personal Allowance taper and, if they have young children, not eligible for Tax-Free Childcare. They pay £800 into a personal pension under relief at source:

• Grossed-up contribution: £800 × 1.25 = £1,000.
• ANI = £101,000 − £1,000 = £100,000.

At exactly £100,000 the full Personal Allowance is back, and Tax-Free Childcare and free childcare are available again because ANI is not over the limit. The pension receives £1,000. The extra 20% relief claimed through Self Assessment is worth £200 and the restored £500 of allowance saves another £200 of 40% tax, so the net cost is about £400. For a parent, the childcare support can be worth far more than that. If you are just over £100,000, £60,000 or another limit, work out the exact contribution you need before the tax year ends on 5 April.

Why people get caught by it

• Your salary can be under a limit while savings interest, dividends, rent or a taxable benefit push your ANI over it.
• Your salary can be over a limit while a pension contribution or Gift Aid brings your ANI back under it.
• So your headline pay can be the wrong number for Child Benefit and childcare decisions.

Use the adjusted net income calculator to work out your own figure, the salary sacrifice calculator to model a pension contribution, and the Child Benefit and HICBC calculator or the Tax-Free Childcare chooser if those limits apply to you. The official definition is in HMRC's adjusted net income guidance and, for the pension taper, HMRC's Pensions Tax Manual (PTM057100).