Have you been wondering what adjusted net income is? Are you confused about how to work it out? Whether you are employed or self-employed, working out your adjusted net income shouldn’t be stressful.

We all heard terms, such as adjusted net income, income tax, personal allowance and so on... but what do they actually mean? At the end of the financial year, many people struggle with their personal tax returns. And end up often getting confused by the language the HMRC use.

In this article, I will be answering the ultimate question: What is adjusted net income? and I will expand on how you can calculate your adjusted net income total.

Adjusted net income is the total income that can be taxed which includes your Personal Allowance and without tax reliefs. If you've had business losses meaning your business has made no profit or lost money. Your pension contributions before tax relief and your pension contributions where your private pension provider has already given you tax relief.

And there is when you sign up for gift aid, which is when you donate to a charity and for every £1 the charity makes of your donations they can also claim an extra 25p. So, let's take a further look into adjusted net income details.

What is Tax Relief?

Tax relief can work in two ways, the first way is if you're self-employed, so you pay less tax to take into account any money spent on your business expenses or you can get tax back or get it repaid in a different way, such as into a private personal pension.

Due to COVID, you may be eligible for tax relief because you are working from home (WFH), so you may be able to claim additional household costs if you have been constantly WFH. However, if you chose to work from home you may not be able to claim tax relief.

If you have been WFH you might be eligible to claim tax relief for:

  • The gas and electricity
  • Your metered water
  • For all your business phone calls

You might even be able to claim tax relief on the full cost of substantial equipment, such as a laptop/computer, which you purchase because you have to buy to do your work. Since this qualifies for a type of capital allowance called annual investment allowance.

For example, Kelly has been working from home since the first lockdown (March 2020) as an Admin Assistant, her offices have no closed and everyone has been made to WFH. Kelly should be able to claim tax relief on her gas, electricity, metered water and also her business phone calls. Kelly might also be able to claim any equipment she purchased to be able to work from her home, such as a desk chair, a desk and a laptop. However, Kelly can not claim for things like her car, the petrol for her car, or items that she owned before she started using them for work purposes. And she won't be able to claim on items that were given to her by her work.

How much you can claim back?

From 6 April 2020, you can claim £6 a week, for the previous tax years the rate was lower at £4, to claim this you will not need to keep evidence of your extra costs.

You have to know the exact amount of extra costs you’ve gained above the weekly amount. You’ll need to have kept all the evidence which are receipts, bills or contracts.

For example, if James falls in the bracket of the 20% basic rate of tax and he decides to claim tax relief on £6 a week he would get £1.20 per week in tax relief. The equation is 20%(the tax rate) of £6.

The tax relief you get will be based on the rate that you pay tax, and you must have paid tax that year to claim any tax relief.

You cannot claim for the whole bill, just the part that relates to your work.

How your Adjusted Net Income can affect your tax

It's important to know your adjusted net income because if it goes over a certain threshold it can affect you:

If were born before the 6th of April 1938 and had an adjusted net income of over £27,700 during the tax year of 2015 to 2016 then you become liable to the income-related reduction to the Higher Personal Allowances.

An example, Tom was born 2nd of January 1938 and had an adjusted net income of £40,000 during the tax year of 2015 to 2016, he became liable to income-related reduction to the Higher Personal Allowance.

As explained above, before if you earn £100,000 you will slowly start to lose your personal allowance and once you hit £125,140 and over you will not receive any personal allowance.

Also, there is the High-Income Child Benefit Charge, so if you're claiming Child Benefit and your adjusted net income or your partners goes over the threshold of £50,270 then you might have to pay some of it back. If it goes over £60,000 then you will have to pay ALL of it back.

How can I work out my adjusted net income?

You will have to follow 4 steps:

Step number 1: You will need to work out your net income.

An example, Jess wants to know her net income so she will need to add all of her taxable income, which includes £29,000 (money she earned from her employment).

If she was also self-employed she would need to add as well.

Jess will now need to add any state benefit she receives, which in her case is just child-benefit £21.15 per week. This adds up to a total of £1,099.

If Jess received any kind of pension she would also add this to the sum however, she does not.

You should also add any interest on savings and pension bonds, Jess receives neither of those.

Jess could add dividends from any company shares she owned, however, she doesn't.

If Jess rented out a property she would also add that to the sum and also if she received any income from a trust. She receives neither of those.

Now, Jess needs to take off any tax relief that might apply to her such as, payments paid to a private pension or trading losses an example of these are trade loss or property loss. None of these applies to her.

So adding all of Jess's net income comes to £30,099.

You will then need to have your income adjusted

Step 2: taking off any Gift Aid donations

So Jess needs to take off £1.25 for every Gift Aid donation she's made out of her net income.

So Jess donated over 5 bags of items, let say there are 7 items in each bag all priced at £1. You then need to add the extra 25p. Which comes to a total of £7.25 per bag, all bags totalling £43.75 per donation.

So Jess donates twice a year, therefore we multiply £43.75 by 2 totalling £87.50.

Step 3: taking off pension contributions

So for every £1 pension contribution she makes, Jess needs to take £1.25 from her net income.

Jess makes a pension contribution of 3% per month which is £57.48 per month. So Jess needs to multiply £1.25 by £57.48 which gives her a total of £71.85 per month.

So Jess needs to multiply £71.85 by 12 (each month) which totals £862.20.

Step 4: You can add back any tax relief for payments you made to a trade union or a police organisation

Jess could have tax relief of up to £100 if she had made any payments to a trade union or a police organisation for retirement, life insurance or any funeral benefit. However, Jess hasn't made any of those contributions.

So now we have to deduct £87.50 and £862.20 of Jess' income, which totals at £29,149.30 and this is Jess' adjusted net income.

Now Jess' adjusted net income will be used to work out her Personal Allowance. So let's look at what a personal allowance is.

What is Personal Allowance?

Your personal allowance is an amount that you are allowed to earn before being taxed. For example, Charlie works as a Finance Manager for a big company and earns £45,000 a year. £12,570 which is his personal allowance will not be taxed. However, the remaining £32,430 will be taxed and will spread over the tax year which is 12 months.

For the tax year of 2021-22, the personal allowance has gone up to £12,570, as in 2020-21, it was lower at £12,500.

You only start paying income tax once you have gone over the personal allowance, you then are charged at a rate of 20%,40% or 45%. There are different tax bands and depending on how much you earn you fall into different categories. You will be either basic rate, higher rate or additional rate taxpayer.

BandTaxable incomeTax rate
Personal AllowanceAnything up to £12,5700%
Basic rateAnything between £12,571 and £50,27020%
Higher rateAnything between £50,271 and £150,00040%
Additional rateAnything that goes over £150,00045%

Also, there is another rule, if you earn £125,140 and over you will not receive the personal allowance on your income. This is because your personal allowance reduces £1 for every £2 that your adjusted net income is above £100,000. So if you are earning £125,140 and over, your personal allowance will come out to £0.

Now that we have gone through adjusted net income and how you can work it out. I hope this has helped you and you found it a useful read. Now, remember that it is very important for you to calculate your net income properly so that your adjusted income is correct.