Adjusted Net Income - deduction for residential property finance costs

I'm trying to calculate my Adjusted Net Income for tax free childcare purposes. I'm looking at the guidance here: https://www.gov.uk/guidance/adjusted-net-income I have some income from UK property. The guidance says 'some rental income' should be included in the adjusted net income calculation. What figure should I include in my net income for the money from rental property? I assume the basic calculation will be income less allowable expenses. But how does the tax relief for residential property finance costs ( https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies ) feed into my adjusted net income? Should I take finance costs off my income, and if so then in what stage of the adjusted net income calculation?

I am trying to calculate my Adjusted Net Income for establishing if I am likely to be over the £50k threshold for recieving the full child benefit. I too assume like Jimssen that I can deduct allowable expenses, but I am unsure if we are allowed to deduct anything for residential property finance costs? Please can you confirm?

Hi Jimssen,
From my understanding of your question and the attached adjusted net income guidance, following step 1- work out your ‘net income’, this section would include your Gross rental income, i.e. total rents and other income from property, then deducting any insurance, repairs, legal & management costs etc.
When looking at the tax relief for residential property finance costs, this is dealt with separately from other expenses incurred.
In the example that you are in a position where a profit has been made on rental income and have exceeded the personal allowance where residential property finance costs incurred are £200, the relief due would be 20% of the finance costs, so in this case would be £40. This would then be included in the net rental profit figure.
Thank you.

 

@HMRC Admin 20, thanks for clarifying that when calculating Net Adjusted Income it is possible to deduct the relief on residential property finance costs (20%).

Hi,

Since the 2020 to 2021 tax year, interest on mortgage payments or residential finance costs are not allowable as expenses.

They are instead used as a  reduction to your tax liability at 20%. For example, £1000 interest costs x 20% = £200. Your overall tax bill is then reduced by £200.

Regardless of your total income you are only allowed relief at 20%.

You can find guidance on how to work this out here:

Tax relief for residential landlords: how it's worked out

Thank you.

@HMRC Admin 2 , did you include guidance on how to calculate the tax relief on residential financial costs, so that we know how much to deduct when calculating our Net Adjusted Income [when calculating whether we are entitled to child benefit]?

Hi,

You can find guidance on how to calculate adjusted net income and tax relief on residential finance costs here:

PIM2058 - Deductions: interest: restriction for income tax purposes from 2017/18: calculation

Thank you

Hi @HMRC Admin 2 - I think that may be a reference to the wrong guidance. PIM2058 seems to refer to the calculation of Adjusted Total Income for the purposes of s23 Income Tax Act 2007. That calculation is used to calculate liability for income tax. This thread is about adjusted net income, which is a different concept used to calculate eligibility for child benefit and childcare. The test is set out in s58 Income Tax Act 2007. So I think you have linked to the wrong guidance. Could you respond or edit your post to clarify please?

Hi not hmrc admin but residential finance costs do not reduce your adjusted net income. So for the purposes of calculating adjusted net income, you ignore the finance costs.

Hi, After reading this thread I am still seeking clarity on how to calculate allowable deductions from rental property income for my adjusted net income calculation. @HMRC Admin 2 please confirm if finance costs can be used as a reduction in tax liability at 20% as outlined above as per in our tax returns, or indeed if they are not deductible at all. Thank you

Hi,
Finance costs get included at box 44 under Residential Property Finance Costs.  
They are not deducted from the property income in the same way as expenses are.  
They are included in the calculation and relief is given at 20% to reduce your income tax liability.  
Examples can be found at:
Tax relief for residential landlords: how it's worked out
Thankyou.

Hi, I want to confirm I understand the above correctly. I am working out my adjusted net income for tax free childcare and free childcare for working parents purposes as I am very close to the £100,000 mark. I receive employment , interest and rental income and a small amount of dividends. 1. Employment Income Pension contributions are deducted before my gross salary is entered on my payslips and this then carries through to my P60. So I understand that there is no further relief for pension contributions and that, for adjusted net income purposes, I use the total gross salary on my P60 or the gross salary as shown on my payslips. Is this correct? 2. Rental income The rental property is managed by an agent and the agent deducts costs such as their own fees, maintenance and repairs, administrative, factoring, some licensing / inspection costs etc before paying me the balance. I pay for other costs such as insurance, other licencing costs separately. The property has no mortgage or financing costs. Is the the rental income I need to consider for calculating my adjusted net income a) the rent as paid by the tenants to the agent, b) the amount paid by the agent to me after costs the agent incurs on my behalf or c) the amount paid by the agent to me after costs the agent incurs on my behalf less the costs I incur? I think it's option c, but would like to be sure. 3. Dividend Income This is below the threshold after which dividend tax is paid. I understand the income nonetheless counts towards my adjusted net income. Is that correct? 4. Interest Income This is below the threshold after which tax is paid on interest. I understand the income nonetheless counts towards my adjusted net income. Is that correct?

Hi,
In regard to question 1, you are correct no further relief would be due for personal pension contributions as these are taken gross, you would also declare your gross income before contributions as these are ignored for the purposes of calculating adjusted net income.
Regarding question 2, would be the total rental income minus costs.
Question 3/4, we would advise dividend & interest income below the allowance would count towards net adjusted income.
For further insight follow the attached guidance:
Personal Allowances: adjusted net income
Thank you.

Hi @HMRC Admin 8, thank you. I’d like to be completely clear what you mean when you say ‘gross income before contributions’. My payslips state a ‘Total Gross’ amount, which is calculated from a ‘Salary’ amount plus a fixed allowance (which is taxable) minus a ‘Salary Exchange’ amount, which is paid to my pension provider before tax is calculated. My understanding before was that the amount that is in adjusted net income is the ‘Total Gross’ amount. In this context, do you mean that I should actually consider the ‘Salary’ amount BEFORE salary exchange on the grounds the Salary Exchange amount is a pension contribution OR that it should be the ‘Total Gross’ amount as explained above and, when you say pension contribution, you mean any additional contribution I make from my bank account?

Hi Sam R,
Please refer to for more information here:
Personal Allowances: adjusted net income
Thank you.