How to reduce your income

There are cases where you might like to reduce your income, taxable income or adjusted net income

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Reducing Adjusted Net Income

Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs.

Those with an Adjusted Net Income of £60,000 and in a household receiving Child Benefit become liable for High Income Child Benefit Charge.

Those with an Adjusted Net Income of £100,000 or more lose access to free childcare hours and tax-free childcare.
Those with an Adjusted Net Income of £100,000 or more start losing personal allowance at a rate of £2 for every £1 above the threshold. This means that at £125,140 adjusted net income, there is no personal allowance left. As a side effect, this means that between £100,000 and £125,138, for every £2 extra you earn, you take home an extra 76p due to tax and NI.

Adjusted Net Income can be reduced by reducing taxable income, making pension contributions, deducting trading losses or making a Gift-Aid donation.

Reducing Taxable Income

Taxable income mostly affects tax bandings.

PAYE Employees

Taxable income can be reduced by contributing to your workplace pension, sharing allowances between spouses and using salary sacrifice schemes.

Interest and Dividend Income

Holding investments in an ISA can avoid taxable income on interest and dividends. Spreading investments between spouses can also help use both personal savings allowances.

Reducing Income

Income can be reduced ad-hoc by buying holiday days, taking unpaid parental leave, taking unpaid leave or perhaps more permanently by moving to fewer hours or fewer days per week.

Worked Example

This worked example shows one simple way an employee on £180,000 adjusted net income could reduce their Adjusted Net Income to £99,999 using a mix of pension contributions, salary sacrifice for an EV, unpaid parental leave and a Gift Aid donation.

Summary target:

  • Starting Adjusted Net Income: £180,000
  • Target Adjusted Net Income: £99,999
  • Total reduction required: £80,001

Assumptions and rules used in this example:

  • Qualifying pension contributions and salary sacrifice reduce Adjusted Net Income by the full amount contributed or sacrificed.
  • Unpaid leave reduces pay pro rata (4 weeks = 4/52 of annual pay).
  • Gift Aid donations reduce Adjusted Net Income by the grossed-up amount (gross = net donation ÷ 0.8, i.e. multiply net donation by 1.25).
  • This is a simplified illustrative example only. Exact tax effects (BIK on cars, employer arrangements, annual pension allowance limits and timing, and how Gift Aid is reported) can change outcomes — check with a tax adviser or payroll team before acting.

Step-by-step example (numbers rounded to the nearest pound):

  1. Make a qualifying pension contribution (or salary sacrifice into pension) of £40,000.

    • Reduction to Adjusted Net Income: £40,000
    • Remaining required reduction: £80,001 - £40,000 = £40,001

  2. Use a salary-sacrifice EV scheme that reduces gross pay by £12,000 per year (example figure).

    • Reduction to Adjusted Net Income: £12,000
    • Remaining required reduction: £40,001 - £12,000 = £28,001

  3. Take 4 weeks unpaid parental leave.

    • Reduction to pay = £180,000 × (4 / 52) = £13,846 (approximately)
    • Reduction to Adjusted Net Income: £13,846
    • Remaining required reduction: £28,001 - £13,846 = £14,155 (approximately)

  4. Make a Gift Aid donation with a net cost of approximately £11,324. The grossed-up amount for adjusted-income purposes is:

    • Grossed-up Gift Aid = £11,324 × 1.25 ≈ £14,155
    • Reduction to Adjusted Net Income: £14,155

Putting it together:

  • £180,000
    • Pension contribution: -£40,000 → £140,000
    • Salary-sacrifice EV: -£12,000 → £128,000
    • 4 weeks unpaid leave: -£13,846 → £114,154
    • Gift Aid (grossed-up): -£14,155 → £99,999

Result: Adjusted Net Income reduced from £180,000 to £99,999.

Notes and caveats:

  • The numbers above are illustrative and rounded. The order of actions, how payroll and pension providers process contributions, employer-specific salary sacrifice rules, and annual allowance limits (for pensions) all affect the final outcome.
  • Salary sacrifice for a car can trigger a benefit-in-kind (BIK) charge for company cars; EVs generally have lower BIK rates but the precise net effect depends on scheme details.
  • Gift Aid reporting uses the grossed-up amount for some tax calculations — the example uses a 20% basic rate gross-up (net × 1.25).
  • Always check timing (which tax year contributions apply to) and any employer or scheme limits. Consult payroll and a tax adviser before making large changes.
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