Adjusted net income

dai_bach

Hello all,

Just trying to plan ahead for this tax year and was hoping someone could clarify my understanding please?

I am trying to calculate my adjusted net income to ensure I do not fall foul of the child benefit charge.

Gross salary: £50,000
Private medical BIK: £400
So ‘Gross’ income = £50,400

I make pension contributions from net income which is grossed up by the pension scheme (20%). I believe there is some sort of relief as a higher rate tax payer on the additional 20% - I was just going to let this flow through my tax code next year after completing my SA.

So, my estimate at the moment is I will make net contributions of ~ £2,100. Based on what I have read on the HMRC website I believe I can use the grossed-up figure of £2,625.

So, my adjusted net income would be £47,775 – is this correct?
The reason I am looking at this now is there is a potential for me to earn a bonus which will put me into the £50k+ adjusted net income range (if my assumptions above are correct) and I will make a one off payment to the pension to bring me back down.

On an aside, how do you treat pension contributions if they are salary sacrifice?

Thanks all!

HappyHarry

dai_bach wrote: »

Hello all,

Just trying to plan ahead for this tax year and was hoping someone could clarify my understanding please?

I am trying to calculate my adjusted net income to ensure I do not fall foul of the child benefit charge.

Gross salary: £50,000
Private medical BIK: £400
So ‘Gross’ income = £50,400

I make pension contributions from net income which is grossed up by the pension scheme (20%). I believe there is some sort of relief as a higher rate tax payer on the additional 20% - I was just going to let this flow through my tax code next year after completing my SA.

So, my estimate at the moment is I will make net contributions of ~ £2,100. Based on what I have read on the HMRC website I believe I can use the grossed-up figure of £2,625.

So, my adjusted net income would be £47,775 – is this correct?
The reason I am looking at this now is there is a potential for me to earn a bonus which will put me into the £50k+ adjusted net income range (if my assumptions above are correct) and I will make a one off payment to the pension to bring me back down.

On an aside, how do you treat pension contributions if they are salary sacrifice?

Thanks all!

Yes, your understanding is correct with regard to the pension contributions and your adjusted net income, provided you are not using salary sacrifice.

However, this is not the case if you are using salary sacrifice. When you use salary sacrifice, then you take a lower salary. Your employer makes a pension contribution on your behalf, but as it is not you who is making the contribution, you can't deduct it from your adjusted net income, and there is no grossing-up.

When using salary sacrifice, you need to look at your reduced salary, plus your bonus, and ignore the pension contributions to arrive at your net adjusted net income.

dai_bach

Thank you for the response Harry, much appreciated.

One final question if I may..
I am looking at setting up Child Care Vouchers. Planning on taking the full £124 a month - does this impact the calculation at all?

Thanks.

HappyHarry

dai_bach wrote: »

Thank you for the response Harry, much appreciated.

One final question if I may..
I am looking at setting up Child Care Vouchers. Planning on taking the full £124 a month - does this impact the calculation at all?

Thanks.

Child care vouchers are normally bought via salary sacrifice. So, similarly to the pension, you get a lower salary to declare and do not have to include the childcare vouchers in your adjusted net income.

Have you taken a look at the new Tax Free Childcare offering? It may offer you more value than the childcare voucher scheme.

https://www.gov.uk/help-with-childcare-costs/tax-free-childcare

Dazed_and_confused

I was just going to let this flow through my tax code next year after completing my SA.

You cannot receive pension tax relief for one year via a later years tax code.

If you complete a Self Assessment return and include pension contributions you will receive whatever relief is due via your Self Assessment tax calculation for that year.

HMRC may then alter your current tax code to provisionally allow tax relief for the current year on the assumption that you will pay a similar pension contribution in the current tax year. This adjustment to your tax code is most definitely not giving you any tax relief for the original pension contribution you entered on your Self Assessment return.

dai_bach

Thanks for clarifying Dazed.

Would that mean I would receive a cheque from the HMRC once my SA was completed?

Dazed_and_confused

If the overall result was an overpayment (and you don't owe HMRC anything for a different year) then yes you would get a refund.

Just check the Self Assessment calculation and this should show the overall result.

If you have overpaid you are able to provide bank details on the return so it is paid directly to your bank, no need for a cheque.

Franco_P

Just tagging on to this thread rather than start a new one.

I am also trying to work out my adjusted net income for the purpose of 30 free hours childcare (which I believe uses adjusted net income, rather than net income as the measure)

To work out my net income, I take:

- Salary
- Car Allowance
- Bonuses
- Stock awards < do i need to include this? this sits in a US stock account and my company withhold some of the stock to pay tax, but i've not yet cashed any of this stock out)
- Benefits (e.g. healthcare/gym etc)

Do I also need to include company pension contributions in the net income?

I then understand whatever value I come to above, I can remove my own personal contributions into my company pension? The pension contributions are taken as a salary sacrifice, so does this make any difference?

Many thanks for any advice

Dazed_and_confused

The pension contributions are taken as a salary sacrifice, so does this make any difference?

Yes. Salary sacrifice means you aren't actually making these pension contributions, your employer is. There is no pension tax relief for salary sacrifice pension contributions, the tax relief comes as a result of your taxable salary being less i.e. salary £60k less £20k sacrificed = £40k taxable salary (the bit that goes on your P60).

You seem to want to be double counting these contributions.

Franco_P

Absolutely don't want to double count, it's just confusing.

On my payslip under payments it shows basic pay - which is my base salary/12 and then shows ER Pension Funding (which seems to marry up with the companies % contribution). And then under deductions it shows Pension which is a larger figure comprising my % and the companies %.

I assume if I'm looking at my 2019 p60 - then the figure in the "Pay in this employment" above the final tax code is the actual taxable income, and is the figure I can use when working out whether I can apply for 30 free hours childcare. Interestingly that figure seems a lot less than my total gross income if I add it up across my payslips. But then again, my total gross also includes "Stock award tax" and ER pension funding, which I assume is not counted by HMRC.

Does this make sense? and I'm assuming this is why IFAs exist

unholyangel

dai_bach wrote: »

Hello all,

Just trying to plan ahead for this tax year and was hoping someone could clarify my understanding please?

I am trying to calculate my adjusted net income to ensure I do not fall foul of the child benefit charge.

Gross salary: £50,000
Private medical BIK: £400
So ‘Gross’ income = £50,400

I make pension contributions from net income which is grossed up by the pension scheme (20%). I believe there is some sort of relief as a higher rate tax payer on the additional 20% - I was just going to let this flow through my tax code next year after completing my SA.

So, my estimate at the moment is I will make net contributions of ~ £2,100. Based on what I have read on the HMRC website I believe I can use the grossed-up figure of £2,625.

So, my adjusted net income would be £47,775 – is this correct?
The reason I am looking at this now is there is a potential for me to earn a bonus which will put me into the £50k+ adjusted net income range (if my assumptions above are correct) and I will make a one off payment to the pension to bring me back down.

On an aside, how do you treat pension contributions if they are salary sacrifice?

Thanks all!

I know this isn't the most recent poster on the thread but for others in a similar situation.....you can only get pension relief for the income that would've fallen into the 40% band. You can claim the full amount, but the adjustment to your tax code will only be for the portion of income that is going to fall into the higher rate band.

This is because the pension provider should be claiming relief at basic rate so to allow you relief on the full amount of contributions would be giving you more tax relief than you actually paid in tax on the contributions.