Adjusted Net Income, the 60% Tax Trap and the Child Benefit Charge

How to calculate adjusted net income

Step 1: add up all taxable income: salary after salary sacrifice and net pay pension contributions, taxable benefits in kind, self-employed profits, rental profits, savings interest, dividends and taxable pensions.

Step 2: deduct trading losses and certain reliefs to get "net income".

Step 3: deduct the gross amount of personal pension contributions paid under relief at source (your payment plus the 20% added by the provider) and the gross amount of Gift Aid donations (your donation x 1.25).

The result is your adjusted net income. Salary sacrifice and net pay contributions are already excluded because they never form part of taxable pay.

Key adjusted net income thresholds

The 60% trap: example and escape route

Example: £110,000 salary, no pension. ANI is £110,000, so the personal allowance falls by £5,000 to £7,570. Income tax is £33,432, which is £6,000 more than at £100,000.

Option 1, salary sacrifice £10,000: ANI drops to £100,000 and the full allowance returns. You save £6,000 tax and £200 NI, so £10,000 reaches your pension for a £3,800 drop in take-home pay.

Option 2, personal pension contribution under relief at source: you pay £8,000, the provider claims £2,000, and the gross £10,000 reduces ANI to £100,000. On your Self Assessment return you claim another £4,000 back (higher-rate relief on the extended basic-rate band plus the restored allowance). Net cost: £4,000 for £10,000 in your pension.

High Income Child Benefit Charge example

Child Benefit for 2026/27 is £27.05 a week for the eldest child and £17.90 for each other child. For two children that is £2,337.40 a year.

With ANI of £70,000 you are £10,000 over the threshold, so you repay 50%: about £1,169. At £80,000 or more you repay it all. The charge is based on the higher earner's individual ANI, not household income.

A £10,000 gross pension contribution would bring ANI back to £60,000, removing the charge and saving 40% tax, roughly £5,169 of combined benefit for a £10,000 contribution. You can register to pay the charge through PAYE rather than Self Assessment, or opt out of receiving Child Benefit while still claiming it to protect NI credits.

Other ways to reduce adjusted net income

• Gift Aid donations: a £800 donation is grossed up to £1,000 and reduces ANI by £1,000.
• Bonus sacrifice into a pension, where your employer allows it.
• Electric car or cycle-to-work salary sacrifice reduces taxable pay (though BIK is added back for cars).
• Moving savings into ISAs, since ISA interest and dividends are excluded from taxable income.
• Watch the annual allowance: total pension contributions above £60,000 (tapered for very high earners) can trigger a tax charge.

Worked adjusted net income calculation

Salary £95,000, rental profit £4,000 and savings interest £2,000 give total taxable income of £101,000. You pay £4,000 into a personal pension (grossed up to £5,000) and give £400 to charity under Gift Aid (grossed up to £500).

Adjusted net income = £101,000 minus £5,000 minus £500 = £95,500. You keep your full personal allowance, and Tax-Free Childcare eligibility is protected. Without those contributions ANI would be £101,000, costing you £500 of personal allowance (an extra £200 of tax) and potentially all Tax-Free Childcare.

The Tax-Free Childcare cliff edge

Tax-Free Childcare stops completely if either parent expects adjusted net income over £100,000. There is no taper, so £1 over the limit can cost thousands.

The government adds 20% to childcare payments, worth up to £2,000 a year per child (£4,000 for a disabled child). A parent with two children in nursery who goes from £99,900 to £100,100 adjusted net income can lose up to £4,000 of top-up, plus the working-parent funded hours in England, which are often worth more. A pension contribution or Gift Aid that brings income back under £100,000 restores both.

Eligibility is reconfirmed every 3 months on a "reasonable expectation" of income for the tax year. If a bonus is coming, plan the pension contribution in the same tax year.

Child Benefit charge at different family sizes

The High Income Child Benefit Charge takes back 1% of Child Benefit for every £200 of adjusted net income above £60,000, so families with more children lose more for each pound over the threshold.

At £70,000 with two children the charge is £1,168 of £2,337.40 received. At £65,000 with three children it is £817 of £3,268.20. Above £80,000 the charge equals the benefit, but claiming still protects NI credits for a parent caring for a child under 12.

Timing matters: adjusted net income is a whole-year figure

• Adjusted net income is measured over the tax year from 6 April to 5 April, not month by month. A December bonus counts the same as one paid in April.
• A personal pension contribution made by 5 April reduces that year's adjusted net income. One made on 6 April counts for the next year.
• Gift Aid donations made after 5 April can be carried back to the previous year on that year's return, which can rescue a year that went slightly over a threshold.
• Salary sacrifice only works for pay not yet earned, so set it up before the bonus or pay rise that would take you over.