Why is “adjusted net income” so vague?

[liamxx7]

Can anyone help me figure out what things are taken into account when working out your personal Net-adjusted income? I need to this to know whether a mix of pension contributions and other deductions can reduce the income but also whether other “incomes” increase the figure. Ultimately this is to see if I can avoid all/some Child Benefit High Income Tax Charge (future family planning).

For simplicity I will alphabetise each “income” or “deduction”.

NB: figures are totally fictional and annualised.
Nb: I don't have all of these incomes and deductions but wanted to be comprehensive for good measure.

A. Income: Annual salary - 60k (higher rate tax payer @40%)

B. Deduction: Pension @10% of gross - £6k

C. Income: National Insurance on pension contribution added into pension amount (~13%) - ~£800

D. Deduction: Employer EV Salary Sacrifice scheme - £9k Gross amount (after Tax and NI Savings ~£6k from net income – don’t know which values is relevant here)

E. Income: Savings interest for the tax year - £2k (tax free allowance @£500) so taxable amount = £1.5k

F. Income: Workplace stock held under scheme (not planning to release until all tax free in ~ 5yrs) BUT dividends are paid out in the form of more stocks into the scheme (no crystallisation of gain) - £1.5k (Tax Free allowance @£1k) so taxable amount = £500

G. Deduction: Charity donation - £1k + Gift aid @25%. Charity claim Gift Aid to make your donation £1250. I pay 40% tax so can personally claim back £250.00 (£1250 x 20%).

H. Income: Premium bonds “winnings” average (win rate @4.65%) - £2k

I. Income: Lodger via Rent a room scheme - £8k (tax free allowance @£7.5k) so taxable amount = £500

I find the “simple” examples on the gov website too simple: https://www.gov.uk/guidance/adjusted-net-income.

Based on the fictitious example above my understanding for the Net-Adjusted income is:

60k (a) – 6k (b) -9k (d) + 1.5k (e) + 0.5k (f) – 1.25k (g) + 0.5k (i) = £46,250 as the adjusted net income.

Based on the calc above Child Benefit High Income Tax Charge is not payable?

Is my understanding correct? If not, can you correct me?

NB1: c (NI Contributions saved) and h (premium bond winnings) are considered N/A.

NB2: I really do not have a clue about d – employer salsac EV scheme and whether it counts as a deduction.

NB3: tax free personal allowances was taken into account.

Thanks in advance all!

 

[joltor0517]

@liamxx7 The guidance isn't too simple, you've just added stuff to it that isn't part of the calculation...!

Your net (non-adjusted) income is:

Salary: 45k (60k minus your £15k in salary sacrifice; salary sac happens before all of this)

Savings interest: 2k

Dividend income: 1.5k

Rental income: 8k

Total: £56.5k

Deductions for net adjusted income:

Charitable donation: 1.25k

Your net adjusted income (for the purposes of child benefit charge) is £56.5k - £1.25k = £55.25k

You will therefore be liable for the High Income Child Benefit Charge. This will be 55.25% of the total Child Benefit you received.

All of the other stuff like savings allowance, dividend allowance, rent-a-room allowance, etc do not feature in the net adjusted income calculation. They do, though, feature in your calculation for your tax bill via your tax return (which you'd need to register for and complete, due to the rented room).

(I also don't understand your NB3 "tax free personal allowance was taken into account") - you shouldn't deduct this from anything. If you did, then you'd need to add that back on and your net adjusted income is 67,820 and you'll be liable for the full 100% High Income Child Benefit Charge.

EDIT: no idea why someone is downvoting this...

 

[mjackson]

@joltor0517 There's a lot of confusion between "tax-free (by which we mean taxed at 0% but still taxable)" and "tax-exempt".

Personal allowances are the former; Premium Bonds, ISAs, the Trading Allowance are the latter.

 

[vido]

@mjackson Same with the charity donations, they alter the income tax thresholds, they don't count as a reduction of your income.

 

[mjackson]

@vido Yes and no: the rebate is handled by adjusting the threshold between basic and higher rates, but they do reduce adjusted net income.

 

[liamxx7]

@mjackson Thank you, yes that is very confusing but what you say makes sense to me.

 

[liamxx7]

@joltor0517 Thank you so much for your detailed response. So what I take away from this is that my company car EV salary sacrifice scheme WOULD definitely reduce my net adjusted income should I go for it?
And even the associated BIK cost (which is rolled into the gross deductible) makes no difference to the reduction of the net adjusted income?

Also i understand that any income earned is counted In full (savings intereste, dividend, rent) without and tax free allowance being taken into account (as another commentator said its taxed at 0% upto the allowance but it is still itself "taxable".
W. R. T nb 3 i just meant that in my head it was only the taxable amount AFTER allowance had been used that should be included in the net adjust income calculation (as per my calculation BUT no I know that was totally wrong, thank you).

W. R. T to dividend i think I need to get proper advice on how that works because I don't touch it and it's all within the scheme (no profit is ever crystallised).....

Also i have no idea why someone would downvote, that was extremely helpful!

 

[joltor0517]

@liamxx7 Yeah thinking fresh - the EV is a bit complicated actually. My understanding is that you will need to add 2% of the P11D value (list price of car and any extras) onto the income at that first part. So assuming 9k was the list price then £180.

 

[liamxx7]

@joltor0517 Na the 9k (totally fake) would be the annual total leasing cost for the year taken off gross (so £750 pm)..... The p11d value of the car are probably Circa 40k-50k value (EVs are expensive!).
So based on 50k 2% BIK would be 1k. So I should add 1k to the net adjust income value?

So 60k gross - 6k pension - 9k lease cost for 1yr +1k p11d value = 46k?

And if via the EV lease, would the BIK value be split over the years of the term (say 1k/2 yrs = £500) or multiplied for the same years? So 1k x 2yrs = 2k?

As you say... Salary sacrifice for EVs is somewhat unclear

 

[followerofchrist1120]

@joltor0517 Are you sure about rent-a-room? The help sheet describes gross receipts below 7.5k as tax exempt, which to my understanding means it’s like earning interest inside an ISA, and not like a tax free allowance on savings / dividends / etc.

https://www.gov.uk/government/publi...23-rent-a-room-scheme-2021#rent-a-room-scheme

 

[sashieng]

@liamxx7 I haven't gone through all of your bits, but under Salary Sacrifice, your 'Total Gross' on your payslip is actually your reduced gross (there is no concept of 'adjusted net income' for pension etc with SS, obviously other adjustable things could 'adjust your net income downwards ,e.g. charitable gifts etc).

 

[liamxx7]

@sashieng Sorry I didn't quite get this, can you elaborate a little more, perhaps with the example income and deductions I have stated above?

 

[sashieng]

@liamxx7 Salary Sacrifice is a contractual arrangement whereby you agree to sacrifice £xxxx and your employer agrees to pay the same £xxxx to you pension usually, but it can cover other things (as per your list).

Because the employer never pays you the actual £xxxx your gross salary (reported to HMRC) is not your contracted salary but your contracted salary minus the £xxxx.

 

[mjackson]

@liamxx7

• Income as it appears (or will appear) on your P60, plus the value of taxable benefits from your P11d
  • covers A, B & D; C is irrelevant except when calculating your annual pension allowance
• Add income from savings interest, which is all taxable apart from ISAs and Premium Bonds: your savings allowance just means that some is taxed at 0%; this is not the same as tax-exempt
  • covers E but your figure is incorrect; H is fully tax exempt in the same way as ISA interest/gains are
• Add income from dividends: this works the same as interest income; some is taxed at 0% but it's all taxable
  • you may need specialist advice regarding F
• Add other sources of income such as self employment and rental income
  • covers I
• Subtract Gift Aid registered & compliant charity donations including the basic rate relief that the charity claimed via Gift Aid
  • covers G
• Subtract pension contributions made outside of SalSac or Net Pay arrangements, where relief at source was claimed by the scheme; include the relief at source gross-up
  • relevant in case you decide to make a lump sum payment to your pension in early April in order to precisely land on an ANI of £50000

 

[liamxx7]

@mjackson Thank you for providing a detailed reply. I understood most of the points apart from
":Income as it appears (or will appear) on your P60, plus the value of taxable benefits from your P11d
* covers A, B & D;"

So does that mean using my example the pension salary sacrifice and ev scheme should be ADDED together (60k salary +6k pension +9k ev scheme =£75k?) - this doesn't sound right to me?
Or did you mean like the first comment where I take the salary (60k) and take away the pension and ev scheme which are both removed from the gross salary anyway?
I. E. 60k - 6k - 9k =45k?

 

[mjackson]

@liamxx7 The latter. Look at your payslips and historic P60s for examples.