Two different measures share almost the same name and do almost opposite things. Adjusted income tapers the pension annual allowance above £260,000. Adjusted net income tapers the personal allowance above £100,000 and drives the child benefit charge above £60,000. Both start from the same figure — and a pension contribution reduces one while leaving the other untouched.
Start with the common base
Both measures begin at net income, which is Step 2 of the calculation in section 23 ITA 2007. That section builds up in steps: Step 1 identifies the amounts of income on which the taxpayer is charged to income tax, and the sum is total income. Step 2 deducts specified reliefs, and what is left is net income. Step 3 then deducts personal allowances.
So total income, net income, adjusted income and adjusted net income are four distinct figures, in that order of derivation. Using one where another is meant is the single most common error in this area.
Adjusted income: the annual allowance taper
The standard annual allowance for 2026/27 is £60,000. Section 228ZA of Finance Act 2004 reduces it — but not below £10,000 — by half the excess of adjusted income over £260,000. The reduction is rounded down to a whole pound.
There are two gateways, and both must be passed before the taper bites. A "high-income individual" has adjusted income of more than £260,000 and threshold income of more than £260,000 less the standard annual allowance — which is £200,000 while the standard allowance is £60,000. Note that the £200,000 figure is not hard-coded in the legislation: it moves automatically if the standard allowance changes.
Adjusted income is net income, plus pension contributions relieved under the net pay or relief-on-making-of-claim routes, plus deductions from employment income, plus the total pension input amount less the member's own contributions, less certain taxable lump sum death benefits. The practical effect is that it adds back pension savings, including employer contributions.
Threshold income is net income, plus any amount by which earnings were reduced by relevant salary sacrifice or flexible remuneration arrangements, less relief-at-source contributions, less taxable lump sum death benefits.
At £360,000 of adjusted income the allowance reaches its £10,000 floor. That figure is arithmetic rather than a published one, and it depends on the standard allowance staying at £60,000.
The trap that follows
Here is why the distinction matters in practice. A personal pension contribution reduces threshold income and adjusted net income, but does not reduce adjusted income — because adjusted income adds pension savings back in.
So the classic move of paying a large pension contribution to get under a threshold works for the personal allowance taper and for the child benefit charge, and does nothing for the annual allowance taper. Someone trying to escape the annual allowance taper by contributing more is moving in the wrong direction.
The threshold income gateway is the exception that makes planning possible: get threshold income to £200,000 or less and the taper does not apply at all, whatever adjusted income is. Salary sacrifice entered into before the relevant date is the usual route, and note that relevant salary sacrifice arrangements are added back into threshold income specifically to prevent the obvious version of this.
There is also a general anti-avoidance provision at section 228ZB catching arrangements that shift adjusted or threshold income between tax years.
What happens if you exceed the allowance
The excess is added to taxable income and charged at marginal rates. Where the charge is large enough, the scheme can pay it on the member's behalf.
Carry forward is the first thing to check before assuming a charge arises: unused annual allowance from the previous three tax years can be carried forward, using the current year first and then the earliest unused year. The individual must have been a scheme member in each year being carried forward.
The money purchase annual allowance is £10,000, triggered by flexibly accessing pension benefits — a flexi-access drawdown payment, an uncrystallised funds pension lump sum, certain stand-alone lump sums and flexible annuities. Once triggered it cannot be undone, and the alternative annual allowance for defined benefit accrual is £50,000.
The lifetime allowance was abolished on 6 April 2024. In its place sit the lump sum allowance of £268,275 and the lump sum and death benefit allowance of £1,073,100.
Adjusted net income: the other one
Adjusted net income is defined in section 58 ITA 2007: net income, less the grossed-up amount of Gift Aid donations, less the gross amount of relief-at-source pension contributions, plus relief for trade union or police organisation payments added back.
It drives two charges:
- The personal allowance taper. The allowance is £12,570, reduced by one half of the excess of adjusted net income over £100,000, reaching nil at £125,140. Inside that band each extra pound of income is taxed at 40% and removes 50p of allowance, giving an effective marginal rate of 60%;
- The high income child benefit charge. It applies where adjusted net income exceeds £60,000, at 1% of child benefit for every £200 above the threshold, reaching 100% at £80,000. The higher earner of a couple pays it.
One update worth noting because the older plan is still widely repeated: the reform to base the child benefit charge on household income was cancelled. It remains an individual-based charge, so two households with the same total income can be treated very differently depending on how that income is split.
What to check, in order
Establish net income first, because everything derives from it. Then compute threshold income — if it is £200,000 or less, the annual allowance taper is irrelevant regardless of adjusted income. Then compute adjusted income if the gateway is passed. Then, separately, compute adjusted net income for the personal allowance and child benefit questions.
And be careful with items that sound capital but are taxed as income. A capital gain does not enter any of these figures. A chargeable event gain on a life policy does. Our guide to how bonuses are taxed covers the 60% band in practice.
Acumon advises individuals on pension allowances and marginal rate planning through private client tax, tax planning and self assessment work. If your employer pension contributions are substantial and your income is near £200,000, the threshold income calculation is the one to run before the year end.