View the related Tax Guidance about Adjusted net income
Tax relief for pension contributions
Tax relief for pension contributionsThe completion of boxes 1 to 4 at the top of page TR4 of the main tax return allows a taxpayer to claim tax relief on pension contributions made in the tax year.Most contributions to registered pension schemes are paid net of basic rate tax relief (via a relief at source scheme), so the only additional relief sought by entry on the tax return is relief at higher rates of tax.For Scottish taxpayers, relief at source is at the Scottish basic rate. From 2017/18 onwards, due to the divergence in the Scottish bands and rates from the rest of the UK, multiple bands need to be extended where pension contributions are paid to relief at source schemes. Scottish tax bands need to be extended for calculating tax on non-savings, non-dividend income. UK tax bands need to be extended for calculating tax on savings and dividend income of Scottish taxpayers. This is discussed further below.Contributions are paid gross to occupational schemes that use a net pay arrangement.For the meaning of a registered pension scheme, relief at source scheme and net pay arrangement, see the Pensions glossary of terms guidance note.The tax relief available for pension contributions is summarised in the Flowchart ― tax relief for contributions to a UK registered pension scheme.Conditions for tax relief to be claimedRelevant UK individualTo obtain tax relief on pension contributions, the scheme member must be a relevant UK individual. This means that the individual must:•have relevant UK earnings chargeable
Cap on unlimited income tax reliefs
Cap on unlimited income tax reliefsSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.IntroductionThe cap on unlimited income tax reliefs applies from 6 April 2013. The cap only applies where the person claims more than £50,000 in reliefs in any one tax year. It acts to limit the relief for the tax year to the greater of:•£50,000•25% of the ‘adjusted total income’ (see below)ITA 2007, s 24A(1)–(5)This guidance note discusses the reliefs which are and are not subject to the cap as well as the operation of the cap. For more on the impact of the cap on claims over multiple tax years, see the Cap on unlimited income tax reliefs ― claims over more than one tax year guidance note. Basis period reform introduces a new element of total income, transition profits arising in 2023/24 including those taxed in any of the four subsequent tax years due to spreading relief. Transition profits are included in total income as a separate component.See the Tax year basis from 2024/25 onwards and Basis period transition rules 2023/24 guidance notes.Reliefs included in the capIn terms of the policy rationale as to which
Childcare and workplace nurseries
Childcare and workplace nurseriesIntroductionA number of employers will provide workplace nursery facilities for their employees. The provision of childcare benefits affords some potentially large tax savings as it allows all or part of the childcare costs to be funded by the employer free of income tax and NIC. Broadly speaking, the legislation covers two forms of exemption: childcare provided at the workplace and other childcare.The various exemptions are found at ITEPA 2003, s 318 onwards.From 6 April 2017, there were significant changes to the operation of tax efficient childcare with the introduction of the ‘tax-free childcare’ scheme, and the other childcare schemes (the employer-contracted scheme and the childcare vouchers scheme) were closed to new entrants on 4 October 2018, subject to transitional arrangements for those already in the scheme. It is worth noting that the administration of many of the tax efficient schemes will be through public agencies rather than through employers.Workplace nurseriesWhere specific criteria are met, the provision of workplace nursery facilities are exempt from tax, NIC and reporting requirements. If these criteria are not met, then a taxable benefit may arise. The requirements for the exemption are found at ITEPA 2003, s 318 and relate to:•the child•the premises on which care is provided and the registration requirements•the person or persons who make the premises available•the extent to which the care is available to the employer’s employeesThe child must either be:•a child or stepchild of the employee, maintained at the employee’s expense•living
Seafarers’ earnings deduction
Seafarers’ earnings deductionSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.This guidance note sets out the conditions for workers on board a ship to obtain a 100% deduction from UK employment income for income tax, where work is partly or wholly overseas. The national insurance position is also considered. See also Checklist ― seafarers’ earning deduction.Working on board a ship, conditions for claiming seafarers' earnings deductionIndividuals who are employed on a ‘ship’ may claim a 100% deduction from UK earnings for income tax, where duties are performed wholly or partly outside the UK, during an eligible period. The deduction is usually referred to as the seafarers’ earning deduction (SED). The conditions are rigorous and are subject to anti-avoidance provisions. As will be seen below, the definition of seafarer is wide and can cover, for example, entertainers working on board a cruise ship. The definition of ship for SED excludes oil and gas exploration, and has implications for divers, especially where work may be within the UK continental shelf (see working as an employee on board a ship, below).The SED will be considered under the following headings: •employee tax residence and
Gifts of cash to charity
Gifts of cash to charityIndividuals receive income tax relief on donations they make to charities. There are three ways in which an individual can obtain income tax relief on cash donations to charity: by gift aid (also known as gift aid relief), by direct deduction from salary under payroll giving and by the retail gift aid scheme.For details of income tax relief available for non-cash donations, see the Gifts of quoted shares and land to charity guidance note.Note that donations to charity are not included in the cap on unlimited income tax reliefs. See the Cap on unlimited income tax reliefs guidance note for more information.Meaning of ‘charity’Donations from 6 April 2010 The definition of charity was significantly altered by FA 2010, extending UK income tax reliefs to charities based overseas in ‘relevant territories’ (ie countries in the European Economic Area). The EEA is comprised of the EU Member States plus Norway, Iceland and Liechtenstein. Although see ‘Repeal of application of gift aid to non-UK charities’ below. The post-5 April 2010 definition of a charity is a body of persons or a trust which:•is established for a charitable purpose only•meets the jurisdictional condition (ie under the jurisdiction of the UK courts or the courts in a relevant territory)•meets the registration condition (ie has complied with any requirement to be included in the register of charities kept under Charities Act 2011, s 30 or with a similar requirement to be included in an equivalent register in a relevant
Married couple’s allowance
Married couple’s allowanceSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.The married couple’s allowance (MCA) is only available if one of the two spouses or civil partners was born before 6 April 1935. This means that one member of the couple must be at least 89 years old on 5 April 2024 to qualify for an allowance in the 2023/24 tax year.There is a distinction in the legislation between couples that married before 5 December 2005 and those that married or entered a civil partnership from this date.Unlike the personal allowance, the MCA is a ‘tax reducer’, not a deduction from net income. Also, MCA can be transferred between spouses / civil partners, although the amount of the allowance is always calculated by reference to the primary claimant.The MCA is reduced where:•the marriage / civil partnership took place in the tax year, or•the primary claimant’s ‘adjusted net income’ exceeds £34,600 for 2023/24 (£37,000 for 2024/25)The commentary in this guidance note applies equally to those in civil partnership as it does to those who are married. For simplicity, the text refers to ‘spouse’, ‘married couples’ and ‘marriage’, but this should
Annual allowance
Annual allowanceSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.The maximum amount that an individual can build up in tax-relieved pension savings is limited in two ways:•first, the annual allowance limits the amount that can be paid into pensions and benefit from tax relief (or the value attributed to increases in scheme benefits for defined benefits pensions). Its operation is discussed below•second, prior to 6 April 2023 the lifetime allowance limited the total tax-relieved value that could be accumulated into registered pension schemes. Its operation and the lifetime allowance charges that could have arisen before 6 April 2023 are discussed in the Lifetime allowance guidance noteThe annual allowance in relation to pension arrangements is the maximum amount:a)by which a member’s benefits can increase in a pension input period (for defined benefit schemes), plusb)that can be contributed to pension arrangements in a pension input period (for defined contribution or money purchase schemes)The total of these figures is the pension input amount (see below).If the pension input amount exceeds the annual allowance, there is a tax charge on the excess (known as the ‘annual allowance charge’) on the member. The annual allowance covers all contributions whether made by the member or any other person,
Life insurance policies ― top slicing relief
Life insurance policies ― top slicing reliefSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.The profits from the surrender of certain life insurance policies are treated as savings income (rather than capital gains) and taxed last after all other income (ie top sliced) in the income tax computation. Usually the gain has a 20% deemed tax credit attached, which means that if the policyholder is a basic rate taxpayer they do not have any further tax to pay. For more on the tax credit and the reporting of life insurance gains, see the Life insurance policies guidance note. You should read that note before continuing as the commentary below assumes familiarity with the terms discussed in that guidance note.Different rules may apply to foreign policies and these are covered in the Offshore bonds and other foreign policies guidance note. That guidance note also explains how to find out if your client has a foreign policy.However, there is an inherent unfairness in treating the life insurance gain as income in one year; the profit has actually accrued over the lifetime of the policy but due to these provisions is subject to tax
High income child benefit tax charge ― overview
High income child benefit tax charge ― overviewIntroductionIntroduced with effect from 7 January 2013, the high income child benefit charge (HICBC) acts to clawback child benefit payments where the person receiving the child benefit or their partner earns at least £60,000 (£50,000 before 6 April 2024). The partner with the higher income is the person who suffers the charge.From 6 April 2024, the rate of the income tax charge is 1% for every £200 by which the adjusted net income exceeds £60,000. This means that complete clawback of the child benefit effectively occurs where the earnings are £80,000 or above. Before 6 April 2024, the income tax charge was 1% for every £100 by which the adjusted net income exceeded £50,000 and full clawback occurred from £60,000. For details of the practical implications of the 2024/25 changes to HICBC, see the High income child benefit tax charge - advising the taxpayer guidance note.If the HICBC is due, the only options open to the individual are to:•suffer the tax charge, or•elect not to receive the child benefitFor those who are subject to the HICBC (ie those affected who have not elected to no longer receive the benefit) must complete a self assessment tax return. Anyone affected by these provisions who does not submit an annual tax return needs to notify their liability to charge to HMRC by 5 October following the end of the tax year (see below).This guidance note considers the mechanics of the HICBC. For a
Personal allowance
Personal allowanceThe personal allowance is a deduction against net income that is available to all UK resident individuals (and some non-residents, see below). The basic personal allowance for 2023/24 and 2022/23 is £12,570. The personal allowance is frozen at £12,570 until 5 April 2028. Where an individual’s net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of income above £100,000. A husband and wife / civil partners are treated as separate persons and so each is entitled to a personal allowance to set against their own personal income. Where one spouse / civil partner is working and the other is not, both personal allowances can be utilised by the transfer of income-producing assets to the non-worker. See the Utilising allowances and lower rate bands guidance note for more details.From 6 April 2015, an individual is able to ‘transfer’ 10% of the personal allowance (£1,260) to the spouse / civil partner, who receives a tax reduction of 20% of this amount. In order to make the transfer, both parties must not be higher rate or additional rate taxpayers. See the Transferable tax allowance (also known as the marriage allowance) guidance note. Personal allowanceThe personal allowance is a deduction from net income (ie a Step 3 deduction, see the Proforma income tax calculation guidance note). It is generally true that if the individual has insufficient income in the tax year to use the allowance, it is lost; it is not possible to carry forward the unused
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