There is a common misconception that employers are somehow responsible for an employees tax affairs. A view probably based on the fact that they do deduct Income Tax from pay.
Many then query why they later receive a tax bill, or more pleasantly, a tax refund.
Payroll operates on a basis of assumptions, so do HM Revenue and Customs (HMRC). Whereas we may take the view that the tax code provides some accuracy, the reality is that often it can be a bit of a guess.
Along with the assumptions and guesses, the tax calculation each period is a fraction of what, in the end, is an annualised calculation.
Accuracy of tax can sometimes be a position of good fortune, coincidence, or a bit of luck. The more birding the operation and unchanged, the better. However, that is not a reflection of real life in many cases. It is often a big guess.
Now at the end of the tax year HMRC will undertake an annualised reconciliation calculation which results in the issuing of an annual P800 which either notices an overpayment (a refund), or a tax demand (often with options to code out for collection).
Of course, for those whose annualised adjusted net income exceeds £100,000, then the individual ultimately looses £1 or free pay for every £2’s over. This is not an automated payroll calculation via PAYE.
So what is adjusted net income?
Adjusted net income is the total taxable income before any Personal Allowances and less certain tax reliefs, for example:
- trading losses
- donations made to charities through Gift Aid — taking off the ‘grossed-up’ gift-aid amount
- pension contributions paid gross (before tax relief)
- pension contributions where your pension provider has already given you tax relief at the basic rate — take off the ‘grossed-up’ amount
So it’s not just about employment income.
When is tax liability affected by the adjusted net income
The adjusted net income will affect tax for any of the following:
- income-related reduction to the Personal Allowance — where you have an adjusted net income over £100,000 (regardless of your date of birth)
- High Income Child Benefit Charge — where you have an adjusted net income above £60,000
Want to know more and how it is worked out?
The HMRC publish information on tpwhat and how the adjusted net income is calculated, see:
PAYadvice.UK 17/11/2024 updated 17/8/2025