When Your Personal Allowance Is Reduced

If you earn over £100,000, you'll start to lose your Personal Allowance — the amount you can earn tax-free each year. For every £2 you earn above this threshold, your Personal Allowance reduces by £1, which can significantly increase your tax bill. What matters is your 'adjusted net income', not simply your gross salary.

What is adjusted net income?

Adjusted net income is your total taxable income before any Personal Allowances are deducted, minus certain tax reliefs. It's the figure HMRC uses to decide whether your Personal Allowance should be reduced.

This is not the same as your gross income. You start with all your taxable income, then make adjustments for things like pension contributions and Gift Aid donations. The result is what counts toward the £100,000 threshold.

When the £100,000 threshold matters

Once your adjusted net income exceeds £100,000, you begin to lose your Personal Allowance. For every £2 you earn above £100,000, your Personal Allowance reduces by £1.

In 2025/26, the standard Personal Allowance is £12,570. This means your Personal Allowance disappears entirely once your adjusted net income reaches £125,140.

Between these two thresholds, you effectively pay tax at 60% on that slice of income — your normal higher rate of 40% plus the loss of allowance worth another 20%.

How to calculate your adjusted net income

Step 1: Work out your net income

Start by adding up all your taxable income. This includes:

• Employment income (salary, bonus, benefits from your job)
• Self-employment profits
• Rental income from property
• Pension income (including the State Pension)
• Interest on savings
• Dividends from company shares
• Income from trusts
• Foreign income
• Some state benefits

From this total, deduct any pension contributions paid gross (where you haven't already received tax relief) and any trading losses or property losses you're claiming.

This gives you your net income.

Step 2: Deduct Gift Aid donations

If you made Gift Aid donations to charity, deduct the 'grossed-up' amount. This means the amount you actually paid plus the basic rate tax.

For every £1 you donated, deduct £1.25 from your net income.

Step 3: Deduct pension contributions

If you made contributions to a private pension where your pension provider gave you basic rate tax relief at source (relief at source schemes), deduct the grossed-up amount.

Again, for every £1 you contributed, deduct £1.25 from your net income.

Step 4: Add back trade union or police organisation payments

If you claimed tax relief on payments to a trade union or police organisation for superannuation, life insurance or funeral benefits (up to £100), add this amount back.

The final figure is your adjusted net income.

A practical example

Bill has taxable income of £115,000:

• Self-employment income: £85,000
• Rental income: £20,000
• Bank interest: £10,000

He makes private pension contributions of £10,000 paid gross (without tax relief).

Bill's net income is £105,000 (£115,000 minus £10,000).

He has no Gift Aid donations or other adjustments, so his adjusted net income is £105,000.

Because this exceeds £100,000 by £5,000, Bill loses £2,500 of his Personal Allowance (£5,000 ÷ 2). His Personal Allowance for the year becomes £10,070 (£12,570 minus £2,500).

Reducing your adjusted net income

The most effective ways to reduce your adjusted net income are:

Making pension contributions: These are deducted when calculating adjusted net income, whether paid gross or through relief at source. Contributing to a pension not only saves for retirement but can also protect your Personal Allowance.

Gift Aid donations: Charitable donations through Gift Aid reduce your adjusted net income by the grossed-up amount, helping you stay below the threshold or reduce the impact.

Claiming trading losses: If you're self-employed and have losses from previous years, using these to offset current year profits reduces your net income.

Why this matters for business owners and directors

If you're a company director, you have more flexibility over when and how you extract income. Taking a combination of salary and dividends, rather than salary alone, won't avoid the £100,000 threshold, but timing those payments across tax years might.

For sole traders with fluctuating income, years when you exceed £100,000 are particularly expensive. Planning pension contributions in high-income years can be tax-efficient.

Landlords should remember that rental income counts toward the threshold. If property income pushes you over £100,000, consider whether increased pension contributions make sense.

The connection to Child Benefit

Adjusted net income is also used to calculate the High Income Child Benefit Charge, which applies when adjusted net income exceeds £60,000. If you're approaching either threshold, the calculation method is the same — so strategies to reduce adjusted net income can help with both.

Sources

• Personal Allowances: adjusted net income

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.