Taxation (UK) · The comprehensive computation of taxable income and income tax liability

Gift Aid, Pension Contributions and Band Extension in TX-UK

Updated 11 October 2026 · Fact-checked

Gift Aid donations and personal pension contributions are paid net of 20% basic rate tax. Gross them up by multiplying the net payment by 100 ÷ 80. Add the gross amount to the £37,700 basic rate band, which also lifts the higher rate threshold. Then compute tax as normal. Test pension contributions against the annual allowance.

Understand Gift Aid, Pension Contributions and Band Extension

Gift Aid and personal pension contributions share one idea. You pay the amount net, after deducting 20% basic rate tax. The charity or the pension scheme claims that 20% back from HMRC. So the gross amount is the net payment ÷ 80% (or net × 100/80).

The payment is not deducted from income in the computation. Instead, the gross amount is added to your basic rate band. The bands are stretched, so more of your income is taxed at 20% instead of 40%, and more of the higher rate band is available before 45% applies. Basic rate relief is therefore given at source, and higher rate relief comes from the extended bands.

The band extension affects every type of income. Non-savings income is taxed first, then savings, then dividends, using the extended bands. A basic rate taxpayer gets no extra tax saving from the extension. A higher rate taxpayer gains because income is moved from 40% into 20%.

The gross payments also reduce adjusted net income. That matters for the personal allowance, which starts to reduce above £100,000 of adjusted net income, and for the child benefit charge. Paying a big gross pension or Gift Aid amount can bring income back under these limits.

Pension contributions have two extra tests. Tax relief on personal contributions is limited to the higher of relevant earnings and £3,600 gross; with no earnings the maximum is £3,600. The total pension input, from you and your employer, is tested against the annual allowance. Unused allowance from earlier years can be carried forward. Any excess is taxed through an annual allowance charge.

Key rules to remember

Grossing up a net payment: Gross = Net × 100 ÷ 80; Applies to Gift Aid donations and personal pension contributions paid net of basic rate tax.
Extended basic rate band: £37,700 + gross Gift Aid + gross personal pension contributions; The basic rate band limit of £37,700 is increased by the gross payments, so the band at 40% starts later. The additional rate threshold of £125,140 of taxable income is also increased by the same gross payments.
Rates on non-savings income: 20% up to the extended basic rate limit (£37,700 + gross payments), 40% above that up to the extended additional rate limit (£125,140 + gross payments), 45% on taxable income above that extended limit; Savings and dividend rates apply within the same extended bands. Dividend rates are 8.75%, 33.75% and 39.35%.
Adjusted net income for personal allowance: Net income − gross Gift Aid − gross personal pension contributions; Personal allowance is £12,570. It reduces by £1 for every £2 of adjusted net income above £100,000, and is nil at £125,140 or more.
Annual allowance: £60,000 for 2023–24 to 2025–26; The minimum allowance is £10,000 and the income limit is £260,000. The allowance reduces by £1 for every £2 of adjusted income above the limit, down to the minimum, for high earners.
Maximum pension contributions qualifying for relief: Higher of relevant earnings and £3,600 (gross personal contributions); With no earnings, the maximum contribution qualifying for relief is £3,600.
Annual allowance carry forward: Available allowance = current year allowance + unused allowance from the previous three tax years; Use the current year first, then the earliest of the three years. The person must have been a member of a registered pension scheme in the earlier years.
Annual allowance charge: Excess pension input over available allowance × taxpayer's marginal rate(s); The excess is treated as the top slice of income and taxed at the rates that apply to it.

How to solve Gift Aid, Pension Contributions and Band Extension questions

Use this method for any question that mixes Gift Aid or pension contributions with an income tax computation.

1Read whether each payment is stated net or gross. Look for words such as 'paid', 'contributed' or 'donated', and note whether the pension is personal or through the employer's payroll.
2Gross up each net personal payment by multiplying by 100 ÷ 80. Do not gross up amounts already gross.
3Compute total income and then adjusted net income by deducting the gross Gift Aid and gross personal pension payments. Check whether the personal allowance is reduced.
4Compute taxable income: total income less the personal allowance. Do not deduct the Gift Aid or the personal pension.
5Extend the bands: £37,700 plus the gross payments. Tax non-savings income first, then savings, then dividends.
6Add tax at each rate and reach the income tax liability. Remember that basic rate relief at source is already reflected in the net payment.
7For pensions, test the gross contributions against the relief limit (higher of earnings and £3,600) and the annual allowance with carry forward. Add any annual allowance charge to the liability.

Quickest way: Gross up, stretch the band, then tax as normal

When to use it: Use this for Section C computations and for objective test questions asking for tax liability or the extended band limit.

Write gross = net × 1.25 beside each payment.
Add the gross total to £37,700 and write the new basic rate limit at the top of your workings.
Work out taxable income and tax it: 20% up to the new limit, 40% above.
For personal allowance questions, subtract the gross payments from income to see whether you are under £100,000.
For pensions, compare total gross contributions with the £60,000 allowance. If over, add unused amounts from the three earlier years before calculating any charge.

Common mistakes in Gift Aid, Pension Contributions and Band Extension

Deducting the gross Gift Aid or personal pension from income to reach taxable income.
Students remember that these payments give tax relief and treat them like a normal deduction.
Fix: Only extend the bands. The deduction is used just for adjusted net income, which tests the personal allowance.
Extending only the higher rate band, or only the basic rate band.
Students think of the relief as higher rate relief only.
Fix: Add the gross amount to the basic rate band. The higher rate threshold moves up by the same amount automatically.
Grossing up incorrectly, for example by adding 20% to the net amount.
Adding 20% feels natural, but 20% is of the gross amount, not the net.
Fix: Always use net × 100 ÷ 80. Net £8,000 gives gross £10,000, not £9,600.
Grossing up an amount that is already gross, such as an employer contribution or a payment described as gross.
Students apply the grossing-up step automatically.
Fix: Check the wording. Employer contributions are not grossed up and do not extend the bands.
Forgetting to reduce adjusted net income when checking the personal allowance.
Students check the £100,000 limit against total income only.
Fix: Use net income less gross Gift Aid and gross personal pension contributions.
Carrying forward unused annual allowance in the wrong order or from more than three years.
Students add all years' unused allowances together without checking the order.
Fix: Use the current year's allowance first, then the earliest of the three previous years. Do not go back further than three years.

Worked examples

Example 1

For 2025–26, Dev has employment income of £70,000 and no other income. He pays a personal pension contribution of £16,000 net and makes a Gift Aid donation of £2,000 net. Calculate his income tax liability.

Show the solution

Gross up the pension: £16,000 × 100 ÷ 80 = £20,000.
Gross up the donation: £2,000 × 100 ÷ 80 = £2,500.
Total band extension = £20,000 + £2,500 = £22,500.
Adjusted net income = £70,000 − £22,500 = £47,500. This is below £100,000, so the full personal allowance of £12,570 applies.
Taxable income = £70,000 − £12,570 = £57,430.
Extended basic rate band = £37,700 + £22,500 = £60,200.
All of the £57,430 falls within the extended basic rate band, so tax = £57,430 × 20% = £11,486.

Answer: Dev's income tax liability is £11,486.

Example 2

For 2025–26, Mia has employment income of £120,000. She pays gross personal pension contributions of £75,000 (net payment £60,000). She has no employer contributions. In earlier years she was a member of a registered pension scheme and had unused annual allowance of nil in 2022–23, £8,000 in 2023–24 and £12,000 in 2024–25. Calculate her income tax liability and state whether an annual allowance charge arises.

Show the solution

Relief limit: tax relief on personal contributions is available up to the higher of relevant earnings (£120,000) and £3,600. The gross contribution of £75,000 is within £120,000, so it qualifies in full.
Available annual allowance = £60,000 + £8,000 + £12,000 = £80,000, with nil from 2022–23. Her income is below the £260,000 income limit, so the allowance is not reduced.
Pension input of £75,000 is below £80,000, so there is no annual allowance charge. The £15,000 above the current year's £60,000 uses the earliest years first: nil from 2022–23, £8,000 from 2023–24 and £7,000 from 2024–25.
Adjusted net income = £120,000 − £75,000 = £45,000. The full personal allowance of £12,570 applies.
Taxable income = £120,000 − £12,570 = £107,430.
Extended basic rate band = £37,700 + £75,000 = £112,700.
All taxable income is within the extended band, so tax = £107,430 × 20% = £21,486.

Answer: Mia's income tax liability is £21,486 and no annual allowance charge arises.

Exam tips

Show the grossing-up line separately. Even if the final figure is wrong, the examiner can award method marks.
Write the extended band limit clearly, for example £37,700 + £22,500 = £60,200, before taxing income.
In objective test questions, check whether the question asks for the net payment, the gross payment or the extended band limit. The wrong answer is often a different one of these three values.
For pensions, always check both limits: relief limited to earnings, and the annual allowance with carry forward from three earlier years.
If income is near £100,000 or £125,140, calculate adjusted net income. The extension may protect the personal allowance.

Practice questions from The comprehensive computation of taxable income and income tax liability

Gift Aid, Pension Contributions and Band Extension: frequently asked questions

What is the difference between gross and net pension contributions for tax relief?

A net contribution is what you actually pay after deducting 20% basic rate tax. The gross contribution is the net amount × 100 ÷ 80 and is the amount that reaches the pension scheme. In the computation you use the gross figure to extend your tax bands.

How does Gift Aid extend the basic rate band in TX-UK?

Gross up the donation by multiplying the net payment by 100 ÷ 80. Add the gross amount to the £37,700 basic rate band. The higher rate threshold moves up by the same amount, so more of your income is taxed at lower rates.

What is the pension annual allowance and can I carry it forward?

The annual allowance is £60,000 for 2023–24 to 2025–26, with a minimum of £10,000 for high earners. You can carry forward unused allowance from the previous three tax years if you were a member of a registered pension scheme. Use the current year first, then the earliest year.

Do employer pension contributions extend the tax bands?

No. Employer contributions are not paid out of your taxed income and are not grossed up, so they do not extend your bands. They do count towards the annual allowance.