Income Tax Act 2007 Explanatory Notes

Section 1025: Meaning of “modified net income”

3112.This section explains how the amount of a person’s “modified net income” is calculated for the purposes of certain provisions of this Act. It is based on sections 348(1) and (2) and 349(1) of ICTA.

3113.The provisions concerned are those providing for:

  • certain adjustments in calculating gift aid relief under Chapter 2 of Part 8;

  • the deduction allowed for annual payments and patent royalties under Chapter 4 of Part 8; and

  • the similar deduction allowed to the trustees of an unauthorised unit trust for payments treated as made by them, under Chapter 9 of Part 9.

3114.The way in which tax deducted from payments within Chapter 4 of Part 8 is recovered sometimes depends on whether the payer has any modified net income in the year in which the payment is made. See Change 82 in Annex 1.

3115.Subsections (2) to (4) provide the details of the calculation of the amount of a person’s modified net income. Starting with net income, the following items are to be excluded:

  • any non-qualifying income included in the person’s charged income. See section 1026, which details the types of income that in the source legislation are to be regarded as being paid “out of” income not brought into charge to income tax;

  • any relief due under Chapter 4 of Part 8 (annual payments and patent royalties); and

  • reliefs or adjustments that, under Schedule 1B to TMA, are stated to “relate to a later year”.

See Change 154 in Annex 1.

3116.Similar calculations also must be made for the purposes of gift aid. See section 427 (meaning of “charged amount”). Gift aid is not given as a deduction from total income, so the deduction for annual payments and patent royalties takes priority. So for those purposes subsection (2)(c) is ignored (subsection (3)).

3117.Trustees of unauthorised unit trusts are treated under the source legislation as making annual payments equal to the grossed-up amount of their income. In this Act this is a separate relief under Chapter 9 of Part 9. So in this case that relief is substituted for the relief for annual payments and patent royalties (subsection (4)).

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