Calculating adjusted net income for tax free childcare / 30 free hours

Thanks I am not sure that this answer is complete because gov.uk is incomplete in its definition of net income. Can you double check the answer please because I think it is wrong. I say that because: 1. ‘Adjusted Net Income’ is defined in section 58 of the Income Tax Act. It prescribes 4 steps to calculating it. Step 1 of those 4 steps is - ‘Take the amount of the individual's net income for the tax year.’ 2. ‘Net income’ is calculated per Step 1 and Step 2 of section 23 of the Income Tax Act because it says after Step 2 ‘The sum of the amounts of the components left after this step is “net income”. So the figure arrived at at the end of Step 2 in section 23 is the ‘net income’, which is in turn the figure for the purposes of ‘net income’ at step 1 of the section 58 adjusted net income calculation. 3. Step 2 of the net income calculation in section 23 provides ‘Deduct from the components (i.e all income) the amount of any relief under a provision listed in relation to the taxpayer in section 24 to which the taxpayer is entitled for the tax year.’ 3. Section 24 lists reliefs deductible at step 2 of section 23 net income calculation and includes at subsection 23(a) ‘Chapter 1 of Part 8 (interest payments)’ 4. Chapter 1 of Part 8 provides at section 383 (1) - ‘A person who pays interest in a tax year is entitled to relief for the tax year for the interest if— (a) the loan on which the interest is payable is a loan to which a provision specified in subsection (2) applies, (b)the interest is eligible for relief in accordance with this Chapter, and (c)the person makes a claim.’ 5. Section 383(2)(c) lists as the provisions pursuant to section 383(1)(a) above: - ‘(c)section 392 (loan to buy interest in close company’ 6. Section 383(5) further supports the deduction for net income purposes because it provides: - ‘ The relief is given by deducting that amount in calculating the person's net income for the tax year in which the interest is paid (see Step 2 of the calculation in section 23).’ 6. Section 392 lists - ‘(b) lending to such a company (I.e a closed company) money which is used wholly and exclusively— (i) for the purposes of the business of the company’ Therefore, assume that the loan is a qualifying loan pursuant to section 392, it seems to me that a qualifying loan is deducted at step 2 of the net income calculation prescribed at section 23 and that this then completes step 1 of the adjusted net income calculation at section 58. Please confirm because the gov.uk guidance is very poorly written and seemingly very incomplete.

Hi M22,
Add together the total income liable to income tax
This includes:
income from employment before tax
profits from self employment
employment benefits (for example medical benefit, car benefit)
pensions including State Pension
income from property
gross savings and dividends
                                                                           
Deduct any allowable reliefs
This includes:
Professional Subscriptions
Flat Rate Expenses
Job Expenses
Payments to pension schemes that have been made without deduction of tax (a gross payment)
Trading losses (early trade loss, trade loss relief against general income, property loss relief against general income)
Qualifying loan interest payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
Deduct any grossed up:
Gift Aid donations
pension contributions    
Do not deduct any pension payments made under net pay arrangements, these are deducted from salary before the employer provides
PAYE and are therefore ignored for the purposes of calculating adjusted net income.
Add any relief claimed for payments to trade unions or police organisations
Thank you.

Hello, please could somebody confirm what period and frequency the adjusted net income is assessed on for the free childcare hours? Eg is it the earnings for 23/24 tax year which determine eligibility for all of 24/25 or an estimate of 24/25 earnings? How often do you need to disclose this information and what then happens if your eligibility status changes from previous period/expected earnings. With previously earning >£100k but then being on maternity pay and then returning part time it is unclear whether I will end up eligible or not. Thanks

I've just had a call with HMRC that my collective earnings will go to 101,000. These are made up from a salary of 87.5k and and a rented flat at 13.5k. I've just sold the flat as of March 31st 2024. The agent on the phone said I could potentially bring earnings down by putting money in a private pension. 1) How much would I need to put in the private pension to bring me back under? 2) As the flat is now sold, but I owned it for all of the previous tax year, is the above private pension even an option i.e. aren't they going to continually calculate my net income based on the entire previous tax year, so I can't affect it now? 3) Or if not the case, and I immediately place X amount into a private pension, when will I be able to claim childcare again? Thanks for any help.

Hi Jess F,
To give you the correct advice, we may require more information.
Please contact our Childcare Service helpline here to allow us to advise you further:
Childcare Service helpline
Thank you. 

 

Hi Richard Kenney

If you pay into a private pension from your net wage and you pay tax at the higher rate then you can claim relief on your pension contributions Tax on your private pension contributions.
For 2023/24 this would cover the dates 6 April 2023 to 5 April 2024. If you sold the flat in March 2024 then would still be in that tax year.

Thank you