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Keeping net adjusted income below £100K

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  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 16,186 Forumite
    10,000 Posts Fifth Anniversary Name Dropper
    edited 24 March 2023 at 10:15AM
    If your taxable income is £100k or more then yes you need to complete a Self Assessment return irrespective of whether any tax is owed or not.
    my net adjusted income will be less than 100K. My annual pension allowance will be over the annual limit amount
    Adjusted net income and taxable income are two completely different things.

    If your total taxable income is £100k or more then a Self Assessment return is required irrespective of what your adjusted net income is.

    Plenty of people have taxable income well in excess of £100k but ANI of £100k or less.  And they are required to complete a tax return.
  • Jeremy535897
    Jeremy535897 Posts: 10,653 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    What has the financial adviser to apologise for if he then merely repeats his original opinion? You would always take into account any brought forward annual allowance in arriving at the excess paid, but that is not in point here as I understand it.

    What was his reaction to the links from Croner and Prudential?

    If you really want to give chapter and verse on this, you start with section 23 ITA 2007, calculating the income tax liability. The short answer is that "net income" is calculated at step 2. Then you deduct personal allowances at step 3. Adjusted net income is defined in section 58 as net income in section 23 less most pension contributions and gift aid.

    Only when you get to step 7 in section 23 do you consider the extra tax charged on excess pension payments over the annual allowance in section 227 FA 2004. Note that the sum charged is never described as "income" because, quite simply, it is not.


  • If your taxable income is £100k or more then yes you need to complete a Self Assessment return irrespective of whether any tax is owed or not.
    my net adjusted income will be less than 100K. My annual pension allowance will be over the annual limit amount
    Adjusted net income and taxable income are two completely different things.

    If your total taxable income is £100k or more then a Self Assessment return is required irrespective of what your adjusted net income is.

    Plenty of people have taxable income well in excess of £100k but ANI of £100k or less.  And they are required to complete a tax return.
    my taxable and net adjusted income are the same. income - pension - other salary sacrifice things. Thanks
  • What has the financial adviser to apologise for if he then merely repeats his original opinion? You would always take into account any brought forward annual allowance in arriving at the excess paid, but that is not in point here as I understand it.

    What was his reaction to the links from Croner and Prudential?

    If you really want to give chapter and verse on this, you start with section 23 ITA 2007, calculating the income tax liability. The short answer is that "net income" is calculated at step 2. Then you deduct personal allowances at step 3. Adjusted net income is defined in section 58 as net income in section 23 less most pension contributions and gift aid.

    Only when you get to step 7 in section 23 do you consider the extra tax charged on excess pension payments over the annual allowance in section 227 FA 2004. Note that the sum charged is never described as "income" because, quite simply, it is not.


    What has the financial adviser to apologise for if he then merely repeats his original opinion? You would always take into account any brought forward annual allowance in arriving at the excess paid, but that is not in point here as I understand it.

    What was his reaction to the links from Croner and Prudential?

    If you really want to give chapter and verse on this, you start with section 23 ITA 2007, calculating the income tax liability. The short answer is that "net income" is calculated at step 2. Then you deduct personal allowances at step 3. Adjusted net income is defined in section 58 as net income in section 23 less most pension contributions and gift aid.

    Only when you get to step 7 in section 23 do you consider the extra tax charged on excess pension payments over the annual allowance in section 227 FA 2004. Note that the sum charged is never described as "income" because, quite simply, it is not.


    Thank goodness for you Jeremy. I really trust your advice and the stuff you've quoted. The financial advisor really just doesn't seem to get this. He is certain that my taxable pension allowance then goes back on net adjusted income! 

    The commenter above has confused me too talking about taxable income and net adjusted income being different. For me I think they are both the same. It's my salary + car allowance + bonus  - pension contributions (as much as i want even if i exceed amount) - shares scheme (which is salary sacrifice) + any taxable benefits (mediplus etc). If i don't make charity gift aid donations these two figures will always be the same for me. If i understand this correctly.

    Ultimately, I just need to know that by salary sacrificing my bonus (which would have taken me over £100K - both net adjusted income and taxable income) and potentially other additional pension payments if my base salary increases, i am eligible for child care and avoid 60% tax. In doing so, it's a large possibility that I could (in future years) breach my annual pension allowance but this doesn't impact me paying 60% tax on my income OR the child care and the tax is dealt with separately through the self assessment (section 23!) -probably 40% tax on what i go over the £60K. In my view this is clear and does not cause an issue...

    Thank you so much again, such straight forward advice.
  • Jeremy535897
    Jeremy535897 Posts: 10,653 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    Just so that you understand the terminology, taxable income is the starting point and that is before pension contributions and gift aid (and other things). See:
    https://www.gov.uk/guidance/adjusted-net-income

    For everyone's benefit, including your financial adviser, here is the legislation in section 23 ITA 2007:

    "The calculation of income tax liability

    To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. 

    Step 1

    Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

    The sum of those amounts is “total income”.

    Each of those amounts is a “component” of total income.

    Step 2

    Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.

    See sections 24A and 25 for further provision about the deduction of those reliefs. (Not relevant to you.)

    The sum of the amounts of the components left after this step is “net income”.

    Step 3

    Deduct from the amounts of the components left after Step 2 any allowances to which the taxpayer is entitled for the tax year under Chapter 2 of Part 3 of this Act (individuals: personal allowance and blind person's allowance).

    See section 25 for further provision about the deduction of those allowances.

    Step 4

    Calculate tax at each applicable rate on the amounts of the components left after Step 3.

    See Chapter 2 of this Part for the rates at which income tax is charged and the income charged at particular rates.

    If the taxpayer is a trustee, see also Chapters 3 to 6 and 10 of Part 9 (special rules about settlements and trustees) for further provision about the income charged at particular rates.

    See also section 863I of ITTOIA 2005 which provides for certain partnership profits to be charged at the additional rate.

    Step 5

    Add together the amounts of tax calculated at Step 4.

    Step 6

    Deduct from the amount of tax calculated at Step 5 any tax reductions to which the taxpayer is entitled for the tax year under a provision listed in relation to the taxpayer in section 26. (Not relevant to you. Includes marriage allowance.)

    See sections 27 to 29 for further provision about the deduction of those tax reductions.

    Step 7

    Add to the amount of tax left after Step 6 any amounts of tax for which the taxpayer is liable for the tax year under any provision listed in relation to the taxpayer in section 30.

    The result is the taxpayer's liability to income tax for the tax year."

    Section 30 (the relevant parts) says:

    "Additional tax

    (1)If the taxpayer is an individual, the provisions referred to at Step 7 of the calculation in section 23 are—

    ...

    section 227 of FA 2004 (pension schemes: the annual allowance charge)"

    Section 58 ITA 2007 says:

    (1)For the purposes of Chapters 2 and 3, an individual's adjusted net income for a tax year is calculated as follows.

    • Step 1

      Take the amount of the individual's net income for the tax year. (This is Step 2 in section 23.)

    • Step 2

      If in the tax year the individual makes, or is treated under section 426 as making, a gift that is a qualifying donation for the purposes of Chapter 2 of Part 8 (gift aid) deduct the grossed up amount of the gift.

    • Step 3

      If the individual is given relief in accordance with section 192 of FA 2004 (relief at source) in respect of any contribution paid in the tax year under a pension scheme, deduct the gross amount of the contribution.

    • Step 4

      Add back any relief under section 457 or 458 (payments to trade unions or police organisations) that was deducted in calculating the individual's net income for the tax year.

      The result is the individual's adjusted net income for the tax year.

    (2)The grossed up amount of a gift is the amount of the gift grossed up by reference to the basic rate for the tax year.

    (3)The gross amount of a contribution is the amount of the contribution before deduction of tax under section 192(1) of FA 2004.

    (4)Subsection (6) of section 809ZM (removal of income tax relief in respect of tainted donations etc) excludes certain donations from being deducted at step 2 in subsection (1)."

    So we work out net income at Step 2 of section 23. Then we work out adjusted net income per section 58. If that is £100,000 or less, childcare is unaffected and personal allowance is not withdrawn. The tax due is calculated going back to section 23 and the remaining steps. Finally, at step 7, the extra tax due because of the annual allowance charge is added to your tax bill. That is my interpretation, and that of Croner and Prudential. Unfortunately a lot of other examples that exist avoid the particular point, because they use an adjusted net income figure that is either too low to be taken above £100,000 by adding in the annual allowance charge, or is above the figure at which personal allowance is lost anyway.

  • kinger101
    kinger101 Posts: 6,510 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    edited 24 March 2023 at 8:52PM
    I've been working through my own situation.  It's always made somewhat challenging as a chunk of my income is in restricted stock options, so I only know their value when they vest.  Stock and currency movements mean this is a bit of a rollercoaster.

    My son is currently two so we've been making use of the £2K government contribution, but the nursery hours won't really kick in until Q1 2024.  This year the focus had been dropping below the £100K to retain the £2K contribution.  Which left me with £13.5K AA from 2020/21 still available for 2023/24. I'd also used bonus sacrifice to kick what would have been a chunk of 2022/23 income into next years' pension contribution.

    Prior to the budget, I'd decided I was just going to have to accept losing 15 of the 30 hours, and the £2K.  

    After a bit of head scratching, I'd decided on the following with the new £60K allowance. 

    (a) use the remaining 2020/21 AA this year by making another SIPP contrubution.

    (b) drop my 2023/24 pension contribution down to 5% to get maximum 10% employer match.  Don't sal. sac bonus into the next year.  This will leave me with approx £20K AA to use the in 2024/25 tax year.   This is the key year, as it's the one where I have the most to lose from hitting the £100K as it would be a full year's nursery entitlement.   

    For the 2024/25 tax year, I will then need to sal. sac that bonus and potentially a chunk of March pay as well, but there's a fighting chance of avoiding super tax.  It's a silly dance to have to go through, but I don't see why I should jump off their cliff if I don't have to.

    "Real knowledge is to know the extent of one's ignorance" - Confucius
  • Jeremy535897
    Jeremy535897 Posts: 10,653 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    In other words, sacrifice one year's personal allowance and childcare (the year that the childcare is the least valuable) to ensure other years are preserved. At least then you don't actually have to put so much money into the pension scheme. There used to be a similar technique in the days of the £25,000 income increase disregard on tax credits, where you would have a low income year followed by a high income year, but the income disregard cancelled the higher year out.
  • kinger101
    kinger101 Posts: 6,510 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    The good part is I'll still use all my pension AA (which I'd do regardless of the nursery hous).  Only the timings change.
    "Real knowledge is to know the extent of one's ignorance" - Confucius
  • kinger101 said:
    I've been working through my own situation.  It's always made somewhat challenging as a chunk of my income is in restricted stock options, so I only know their value when they vest.  Stock and currency movements mean this is a bit of a rollercoaster.

    My son is currently two so we've been making use of the £2K government contribution, but the nursery hours won't really kick in until Q1 2024.  This year the focus had been dropping below the £100K to retain the £2K contribution.  Which left me with £13.5K AA from 2020/21 still available for 2023/24. I'd also used bonus sacrifice to kick what would have been a chunk of 2022/23 income into next years' pension contribution.

    Prior to the budget, I'd decided I was just going to have to accept losing 15 of the 30 hours, and the £2K.  

    After a bit of head scratching, I'd decided on the following with the new £60K allowance. 

    (a) use the remaining 2020/21 AA this year by making another SIPP contrubution.

    (b) drop my 2023/24 pension contribution down to 5% to get maximum 10% employer match.  Don't sal. sac bonus into the next year.  This will leave me with approx £20K AA to use the in 2024/25 tax year.   This is the key year, as it's the one where I have the most to lose from hitting the £100K as it would be a full year's nursery entitlement.   

    For the 2024/25 tax year, I will then need to sal. sac that bonus and potentially a chunk of March pay as well, but there's a fighting chance of avoiding super tax.  It's a silly dance to have to go through, but I don't see why I should jump off their cliff if I don't have to.

    Why would you not just pay the tax on the excess pension allowance that you breach. That’s better than paying the 60 percent tax trap you’d pay if it was in your income over 100K and you’d lose 2K of tax free child care?from Jeremy’s advice you can keep below 100K and benefit from the kids stuff whilst still going over the 60K pension allowance, they are kept separate apparently. 
  • Just so that you understand the terminology, taxable income is the starting point and that is before pension contributions and gift aid (and other things). See:
    https://www.gov.uk/guidance/adjusted-net-income

    For everyone's benefit, including your financial adviser, here is the legislation in section 23 ITA 2007:

    "The calculation of income tax liability

    To find the liability of a person (“the taxpayer”) to income tax for a tax year, take the following steps. 

    Step 1

    Identify the amounts of income on which the taxpayer is charged to income tax for the tax year.

    The sum of those amounts is “total income”.

    Each of those amounts is a “component” of total income.

    Step 2

    Deduct from the components the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.

    See sections 24A and 25 for further provision about the deduction of those reliefs. (Not relevant to you.)

    The sum of the amounts of the components left after this step is “net income”.

    Step 3

    Deduct from the amounts of the components left after Step 2 any allowances to which the taxpayer is entitled for the tax year under Chapter 2 of Part 3 of this Act (individuals: personal allowance and blind person's allowance).

    See section 25 for further provision about the deduction of those allowances.

    Step 4

    Calculate tax at each applicable rate on the amounts of the components left after Step 3.

    See Chapter 2 of this Part for the rates at which income tax is charged and the income charged at particular rates.

    If the taxpayer is a trustee, see also Chapters 3 to 6 and 10 of Part 9 (special rules about settlements and trustees) for further provision about the income charged at particular rates.

    See also section 863I of ITTOIA 2005 which provides for certain partnership profits to be charged at the additional rate.

    Step 5

    Add together the amounts of tax calculated at Step 4.

    Step 6

    Deduct from the amount of tax calculated at Step 5 any tax reductions to which the taxpayer is entitled for the tax year under a provision listed in relation to the taxpayer in section 26. (Not relevant to you. Includes marriage allowance.)

    See sections 27 to 29 for further provision about the deduction of those tax reductions.

    Step 7

    Add to the amount of tax left after Step 6 any amounts of tax for which the taxpayer is liable for the tax year under any provision listed in relation to the taxpayer in section 30.

    The result is the taxpayer's liability to income tax for the tax year."

    Section 30 (the relevant parts) says:

    "Additional tax

    (1)If the taxpayer is an individual, the provisions referred to at Step 7 of the calculation in section 23 are—

    ...

    section 227 of FA 2004 (pension schemes: the annual allowance charge)"

    Section 58 ITA 2007 says:

    (1)For the purposes of Chapters 2 and 3, an individual's adjusted net income for a tax year is calculated as follows.

    • Step 1

      Take the amount of the individual's net income for the tax year. (This is Step 2 in section 23.)

    • Step 2

      If in the tax year the individual makes, or is treated under section 426 as making, a gift that is a qualifying donation for the purposes of Chapter 2 of Part 8 (gift aid) deduct the grossed up amount of the gift.

    • Step 3

      If the individual is given relief in accordance with section 192 of FA 2004 (relief at source) in respect of any contribution paid in the tax year under a pension scheme, deduct the gross amount of the contribution.

    • Step 4

      Add back any relief under section 457 or 458 (payments to trade unions or police organisations) that was deducted in calculating the individual's net income for the tax year.

      The result is the individual's adjusted net income for the tax year.

    (2)The grossed up amount of a gift is the amount of the gift grossed up by reference to the basic rate for the tax year.

    (3)The gross amount of a contribution is the amount of the contribution before deduction of tax under section 192(1) of FA 2004.

    (4)Subsection (6) of section 809ZM (removal of income tax relief in respect of tainted donations etc) excludes certain donations from being deducted at step 2 in subsection (1)."

    So we work out net income at Step 2 of section 23. Then we work out adjusted net income per section 58. If that is £100,000 or less, childcare is unaffected and personal allowance is not withdrawn. The tax due is calculated going back to section 23 and the remaining steps. Finally, at step 7, the extra tax due because of the annual allowance charge is added to your tax bill. That is my interpretation, and that of Croner and Prudential. Unfortunately a lot of other examples that exist avoid the particular point, because they use an adjusted net income figure that is either too low to be taken above £100,000 by adding in the annual allowance charge, or is above the figure at which personal allowance is lost anyway.

    Thanks Jeremy. This is a little over my head. My payslip has a “taxable pay” section. This equates to my wage plus car allowance plus bonus minus what I pay into my pension minus what I pay into my shares. For me, following the guidance this “taxable pay” as defined by my payslip is also my adjusted net income? Please say it’s not more complicated than that. What else do I need to consider for net adjusted income.

    I must say I am a bit confused now. To confirm, I can keep my taxable pay/adjusted net income (as far as I can see these are the same for me) below 100K whilst breaching the 60K pension limit as the tax paid on the pension is dealt with separately and does not impact the net adjusted income figure used for the child care?

    thanks and hopefully my last post :-)
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