Adjusted Net Income (ANI) influences whether you pay extra tax charges such as the High Income Child Benefit Charge (HICBC) or lose part of your Personal Allowance when income exceeds certain thresholds. Understanding how to calculate ANI helps you make better financial decisions and may lower your tax liability.
What Is Adjusted Net Income?
Adjusted Net Income is your total taxable income before subtracting your Personal Allowance minus specific tax reliefs. It encompasses all taxable income sources, including salaries, self-employment profits, interest on savings, dividends from shares, and rental income. From this total, certain tax reliefs, such as pensions paid gross (before tax relief), Gift Aid donations, and relevant trading losses, are deducted to arrive at your final ANI.
Why Does Adjusted Net Income Matter?
- High-Income Child Benefit Charge (HICBC): If your ANI exceeds £50,000, you may have to pay a charge on any Child Benefit you or your partner receive. Once your ANI passes £60,000, you could lose the entire benefit through this charge.
- Personal Allowance Reduction: If your ANI is over £100,000, your Personal Allowance is reduced by £1 for every £2 of income above this threshold. This can significantly increase your overall tax bill if you are not aware of it in advance.
Steps to Calculate Your Adjusted Net Income
- Determine Your Net Income
- Add up all taxable income: This includes employment earnings, self-employment profits, most pensions (State Pension, workplace, and private pensions), interest on savings, dividends from shares, and any rental or trust income.
- Subtract allowable reliefs: Deduct gross (untaxed) pension contributions, along with trading losses if applicable. The result is your net income.
- Subtract Gift Aid Donations
- For each £1 you donate through Gift Aid, you can take off £1.25 from your net income—the additional 25p accounts for the basic rate tax relief that charities claim on your donation.
- Subtract Pension Contributions with Basic Rate Relief
- If your pension provider has already applied basic rate tax relief to your contributions, you again deduct the ‘grossed-up’ amount from your net income. As with Gift Aid, this is typically £1.25 for each £1 contributed.
- Add Back Certain Reliefs (If Applicable)
- If you made payments to a trade union or police organization (up to £100 in tax relief) for superannuation, life insurance, or funeral benefits, and you subtracted them at the start, add them back in at this stage.
The figure you have after these four steps is your Adjusted Net Income.
Examples in Practice
- Personal Allowance Reduction: Suppose your total taxable income is £115,000, including earnings from self-employment, property, and savings. If you contribute £10,000 privately to your pension (without tax relief), your net income becomes £105,000. No other adjustments apply, so your ANI remains £105,000. HM Revenue & Customs will use this figure to calculate the reduction in your Personal Allowance.
- High-Income Child Benefit Charge: Imagine you earn £65,000 in employment income plus £5,000 in savings interest. After contributing £4,750 to a pension without tax relief, your net income drops to £65,250. If you donate £1,000 under Gift Aid, you deduct £1,250 from your net income, bringing your ANI to £64,000. This is used to work out your Child Benefit charge.
Avoiding Extra Tax Charges
- Pension Contributions: Strategically increasing pension contributions can help you stay below key thresholds, thus reducing or eliminating additional tax charges.
- Gift Aid Donations: Making charitable donations benefits worthy causes and lowers your ANI, potentially avoiding the tapering of allowances.
- Income Timing: If you have flexibility in how or when you receive income—especially self-employment or dividend income—consider scheduling it to remain within beneficial thresholds.
Accurately determining your Adjusted Net Income (ANI) is important to calculate accurate tax liabilities. Strategic pension contributions, planned Gift Aid donations, and careful income timing can help you avoid unexpected charges and retain more of your earnings.
If you need help, call our tax accountants or send us an email for further clarification.
