Adjusted net income and tax free childcare

Hello,

I'm trying to work out my 'adjusted net income' to see if I'm still eligible for tax free childcare this year. I've read the guidance at HMRC (gov.uk/guidance/adjusted-net-income) and googled it, but I still don't understand. I'm hoping someone can explain this in simple language to me!

Situation: I work for the NHS and have the standard NHS pension. We have a tax free childcare account.  My income for this tax year (22-23) is hovering around £100k (my wife earns less). I will pay around £12k in pension contributions this year. I am not 100% sure, but I think contributions to the NHS pension scheme are before tax is taken off: NHS Pension Scheme members will receive tax relief on their pension contributions up to a certain amount. This is because contributions are taken from pay before tax is taken off, therefore contributions reduce the amount of pay subject to tax. )

Question: is my adjusted net income going to be £100k or £88k (or even £85k as 1.25 x £12k = £15k)?

Many thanks in advance & apologies for my ignorance!
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Comments

  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 13,395 Forumite
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    edited 28 October 2022 at 10:28AM
    Your adjusted net income isn't just about your earnings, it's all taxable income which has to be considered.

    Presumably your final payslip in March and P60 will both show taxable pay of £88,000 so that is your starting point.

    Also there is no pension tax relief with net pay pension contributions, the tax benefit comes form not being taxed on your salary in the first place i.e. instead of being taxed on £100k you are only taxed on £88k.

    It's relief at source contributions which get 25% added (20% of the gross contributions).

    NB.  If you have minimal other taxable income, say some interest or a few dividends then your pension contributions will actually have saved you from paying £4,800 in tax, effectively 40% personal saving for you.
  • Thanks for your help, really appreciate it.

    My payslip states 'taxable pay' of £88k (this seems to equal 'total pay' minus 'pension contributions'), is this the same as 'adjusted net income'? 

    (I realise that additional taxable income has to be added, and gift aid can be deducted too).

    I'm just trying to work out what my 'adjusted net income' will be, as I need to decide about increasing gift aid etc to avoid losing tax free childcare.


  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 13,395 Forumite
    First Anniversary First Post Name Dropper
    edited 28 October 2022 at 11:08AM
    SantiagoX said:
    Thanks for your help, really appreciate it.

    My payslip states 'taxable pay' of £88k (this seems to equal 'total pay' minus 'pension contributions'), is this the same as 'adjusted net income'? 

    (I realise that additional taxable income has to be added, and gift aid can be deducted too).

    I'm just trying to work out what my 'adjusted net income' will be, as I need to decide about increasing gift aid etc to avoid losing tax free childcare.


    No, it isn't adjusted net income.

    It is the starting point in calculating your adjusted net income.

    Basically add up all your taxable income and deduct Gift Aid (the gross contribution) and the gross amount of any eligible pension contributions (doesn't seem applicable to you).  Full details here.

    https://www.gov.uk/guidance/adjusted-net-income
  • Thanks - I have read that link and failed to understand any of it - you've done a much better job!

    Just to make sure I've understood correctly, adjusted net income should be (assuming I have no other income):

    Taxable income (i.e. gross pay minus NHS pension contributions) minus grossed gift aid

    My main question was whether it was taxable income or gross income to use, but you've said the former - which is exactly the answer I was hoping to hear!

  • eyalmms
    eyalmms Posts: 13 Forumite
    First Post First Anniversary
    I'm in the same boat.

    I spoke to the eligibility people at HMRC and they've specifically told me I CANNOT deduct my pension OR use my taxable pay in the calculation. They told me I have to use gross pay, and as the NHS pension is not a private fund, I can't deduct it. 

    My gross pay is over 100k, my taxable pay is under because my payslips don't include the pension contributions in the taxable pay.

    Is anyone able to confirm categorically whether I'm eligible?!
  • [Deleted User]
    [Deleted User] Posts: 0 Newbie
    First Anniversary Photogenic Name Dropper First Post
    edited 6 February 2023 at 2:39PM
    eyalmms said:
    I'm in the same boat.

    I spoke to the eligibility people at HMRC and they've specifically told me I CANNOT deduct my pension OR use my taxable pay in the calculation. They told me I have to use gross pay, and as the NHS pension is not a private fund, I can't deduct it. 

    My gross pay is over 100k, my taxable pay is under because my payslips don't include the pension contributions in the taxable pay.

    Is anyone able to confirm categorically whether I'm eligible?!
    Unfortunately you were unlucky with your HMRC adviser and that’s being kind! If your taxable pay is under £100k that is your starting point for determining adjusted net income. Your taxable pay in this pension scheme is after pension deductions. If you have no other additional income there is nothing to worry about. 

    Hopefully, though, your payslips should show gross pay, taxable pay and pension contributions to date on the right hand side. If there are no other deductions the pension conudhoukd be equal to the difference between the gross pay and net. 
  • eyalmms
    eyalmms Posts: 13 Forumite
    First Post First Anniversary
    edited 6 February 2023 at 4:05PM
    purdyoaten2 said:
    eyalmms said:
    I'm in the same boat.

    I spoke to the eligibility people at HMRC and they've specifically told me I CANNOT deduct my pension OR use my taxable pay in the calculation. They told me I have to use gross pay, and as the NHS pension is not a private fund, I can't deduct it. 

    My gross pay is over 100k, my taxable pay is under because my payslips don't include the pension contributions in the taxable pay.

    Is anyone able to confirm categorically whether I'm eligible?!
    Unfortunately you were unlucky with your HMRC adviser and that’s being kind! If your taxable pay is under £100k that is your starting point for determining adjusted net income. Your taxable pay in this pension scheme is after pension deductions. If you have no other additional income there is nothing to worry about. 

    Hopefully, though, your payslips should show gross pay, taxable pay and pension contributions to date on the right hand side. If there are no other deductions the pension conudhoukd be equal to the difference between the gross pay and net. 
    Thank you so much for replying.

    That's reassuring. Although now there's a recorded conversation whereby I'm told I can't reconfirm my eligibility in March. Can I just ignore him or do I call back and argue my case?!

    Payslips show a) gross pay, b) taxable pay and c) pension where a=b+c and he was adamant that starting point was gross income...

    How should I proceed?

    Thanks again

    E
  • eyalmms said:
    purdyoaten2 said:
    eyalmms said:
    I'm in the same boat.

    I spoke to the eligibility people at HMRC and they've specifically told me I CANNOT deduct my pension OR use my taxable pay in the calculation. They told me I have to use gross pay, and as the NHS pension is not a private fund, I can't deduct it. 

    My gross pay is over 100k, my taxable pay is under because my payslips don't include the pension contributions in the taxable pay.

    Is anyone able to confirm categorically whether I'm eligible?!
    Unfortunately you were unlucky with your HMRC adviser and that’s being kind! If your taxable pay is under £100k that is your starting point for determining adjusted net income. Your taxable pay in this pension scheme is after pension deductions. If you have no other additional income there is nothing to worry about. 

    Hopefully, though, your payslips should show gross pay, taxable pay and pension contributions to date on the right hand side. If there are no other deductions the pension conudhoukd be equal to the difference between the gross pay and net. 
    Thank you so much for replying.

    That's reassuring. Although now there's a recorded conversation whereby I'm told I can't reconfirm my eligibility in March. Can I just ignore him or do I call back and argue my case?!

    Payslips show a) gross pay, b) taxable pay and c) pension where a=b+c and he was adamant that starting point was gross income...

    How should I proceed?

    Thanks again

    E
    Ask to speak to a manager or equivalent:

    From this site:

    https://www.moneysavingexpert.com/family/tax-free-childcare/

    • Each earn less than £100,000 a year. This means if both partners earn £99,999 you can qualify, but if one earns £30,000 and the other £110,000, you won't. However, eligibility is based on your 'adjusted net income' (your total taxable income minus certain tax reliefs, like pension contributions, or charity donations). So, if you pay any tax-deductible expenses, these might take you below the threshold.
  • eyalmms
    eyalmms Posts: 13 Forumite
    First Post First Anniversary
    Although their confirmation page specifically states it doesn't include "many" pension contributions!! Hence being so confused!!
  • eyalmms
    eyalmms Posts: 13 Forumite
    First Post First Anniversary
    Or is that saying pension contributions aren't included, rather than pension contributions can't be deducted!!
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