Key takeaways
- Adjusted net income is your total taxable income, less certain reliefs, less grossed-up pension contributions and Gift Aid donations.
- It decides whether you lose your Personal Allowance (over £100,000) and whether you pay the High Income Child Benefit Charge (over £60,000).
- It also decides eligibility for Tax-Free Childcare and the extra free childcare hours, which stop if either parent has adjusted net income over £100,000.
- Personal pension contributions and Gift Aid reduce it; salary sacrifice reduces your salary, so it reduces it too.
- Small changes near a threshold can save far more tax than the headline rate suggests.
Adjusted net income is not a figure you will see on a payslip, but it controls some of the most expensive cliff edges in the UK tax system. If your income is anywhere near £60,000 or £100,000, understanding how it is calculated, and what reduces it, can be worth thousands of pounds a year.
How adjusted net income is calculated
HMRC’s calculation has four steps:
- Start with your net income: your total taxable income from all sources (employment, self-employment, pensions, property, savings and dividends) before any Personal Allowance, minus certain reliefs such as trading losses and pension contributions made under a net pay arrangement.
- Deduct the grossed-up value of Gift Aid donations. A £400 donation counts as £500 gross.
- Deduct the grossed-up value of pension contributions paid to a scheme under relief at source, such as a personal pension or SIPP. A £8,000 payment counts as £10,000 gross.
- Add back any relief for payments to a trade union or police organisation deducted at step 1.
The result is your adjusted net income.
Which pension contributions count
- Relief at source (most personal pensions, SIPPs and some workplace schemes): deduct the gross contribution at step 3.
- Net pay arrangements (many occupational schemes): your contributions are taken from pay before tax, so they are already excluded from net income.
- Salary sacrifice: your salary is lower, so the sacrificed amount never counts as income.
- Employer contributions: not part of your income at all.
What adjusted net income is used for
| Threshold | Adjusted net income | Effect |
|---|---|---|
| High Income Child Benefit Charge | Over £60,000 | Charge of 1% of Child Benefit for every £200 over; all of it repaid at £80,000 |
| Personal Allowance taper | Over £100,000 | Allowance reduced by £1 for every £2 over; nil at £125,140 |
| Tax-Free Childcare and extra free childcare hours | Over £100,000 (either parent) | Lose eligibility entirely |
| Married Couple’s Allowance (born before 6 April 1935) | Over £39,200 in 2026/27 | Allowance reduced towards the minimum |
The childcare limit is a cliff edge: £1 over £100,000 can cost a family Tax-Free Childcare worth up to £2,000 a year per child, plus free hours worth several thousand pounds.
Worked example: restoring the Personal Allowance
Sam earns a salary of £110,000 in 2026/27 and has no other income. Adjusted net income is £110,000, so £5,000 of the Personal Allowance is lost.
Sam pays £8,000 into a personal pension. The provider adds £2,000 basic rate relief, making a gross contribution of £10,000. Adjusted net income falls to £100,000 and the full allowance is restored.
| Effect of the £10,000 gross contribution | Saving |
|---|---|
| Basic rate relief added by the provider | £2,000 |
| Higher rate relief claimed through Self Assessment (20% of £10,000) | £2,000 |
| Personal Allowance restored (£5,000 at 40%) | £2,000 |
| Total tax relief | £6,000 |
The £10,000 in the pension cost Sam £4,000 after tax relief, an effective relief rate of 60%. Our guide to tax relief on pension contributions explains how to claim the higher rate element.
Worked example: the Child Benefit charge
Jo earns £68,000 and claims Child Benefit for two children, worth £2,337.40 a year in 2026/27 (£27.05 a week for the eldest and £17.90 for the second, over 52 weeks). Adjusted net income is £8,000 over £60,000, so the charge is 40% of the benefit: about £935.
A gross pension contribution of £8,000 would bring adjusted net income down to £60,000, removing the charge entirely as well as saving higher rate tax. See the High Income Child Benefit Charge guide.
Ways to reduce adjusted net income
- Personal pension contributions, within the annual allowance of £60,000 (lower for very high earners and for those who have flexibly accessed a pension)
- Salary sacrifice into an employer pension, which also saves National Insurance
- Gift Aid donations, if you were planning to give anyway
- Moving income-producing assets to a spouse or civil partner with lower income, where the gift is genuine and outright
- For company directors, timing dividends or taking more of the reward as employer pension contributions
Our higher rate tax planning guide looks at these in more detail.
Frequently asked questions
Is adjusted net income the same as my salary?
Not necessarily. It includes all taxable income, such as rental profits, interest and dividends, and is reduced by grossed-up pension contributions under relief at source and Gift Aid.
Do employer pension contributions reduce adjusted net income?
They are never counted as your income, so they do not increase it. Contributions you make through salary sacrifice reduce your salary, so they lower it.
How do I claim the reduction for pension contributions?
If you file Self Assessment, enter the gross contributions to relief at source schemes on your return. If not, you can ask HMRC to adjust your tax code or claim by letter or online.
What adjusted net income stops Tax-Free Childcare?
Over £100,000 for either parent in the tax year. Reducing it below £100,000, for example through pension contributions, restores eligibility.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.