"Income" sounds simple — money you receive. But UK tax terminology distinguishes between earned, unearned, gross and net income, each with different tax treatment. This is your starter reference.
The dictionary definition
Income (noun): money received, especially on a regular basis, for work or through investments.
For everyday use, that's enough. For UK tax purposes, HMRC distinguishes several types of income that are treated differently.
Earned income vs unearned income
Earned income
Income from personal exertion — what you get paid for working. Includes:
- Employment salary, wages, bonuses, commission, tips
- Self-employment trading profits
- Pension income (treated as earned for most purposes, though you didn't earn it in the current year)
- Benefits in kind (BIK): company car, private health insurance
Earned income is subject to both income tax AND National Insurance. It's the most heavily taxed category.
Unearned income (investment/savings income)
Income from assets or capital rather than labour. Includes:
- Bank and building society interest
- Dividends from shares
- Rental profits from property
- Bond coupons
- Interest from peer-to-peer lending
Unearned income is subject to income tax but not National Insurance — an important distinction for anyone planning their tax affairs.
Gross income vs net income
Gross income
Gross income is your total income before any deductions. For an employee, your gross salary is the number on your employment contract — before income tax, NI, pension, student loan or anything else is taken off.
For the self-employed, gross income usually means your turnover (total revenue) rather than profit. When someone says "I earn £100,000 gross," they typically mean £100,000 coming in before expenses and tax.
Net income
Net income is what remains after deductions. The definition varies by context:
- Net pay / take-home pay: gross salary minus income tax, NI, pension, student loan — the amount actually paid into your bank account.
- Net trading income (self-employed): turnover minus allowable business expenses — the profit before personal income tax.
- Adjusted net income (HMRC term): a specific calculation used for Personal Allowance taper and Child Benefit High Income Charge. It's gross income minus certain deductions (pension contributions, Gift Aid) but not income tax.
Examples: gross vs net in practice
Employee earning £50,000 gross:
- Income tax: £7,486 (20% of £37,430)
- National Insurance: £3,002
- Net take-home: approximately £39,512 (£3,293/month)
Self-employed with £100,000 turnover:
- Business expenses: £25,000 (office, software, travel, etc.)
- Net trading profit: £75,000 (this is the number HMRC taxes)
- Income tax + Class 4 NI on £75,000: approximately £22,000
- Take-home after tax: approximately £53,000
Other income terminology you'll encounter
Adjusted net income (ANI)
HMRC's specific calculation for Personal Allowance taper and Child Benefit Charge. ANI is gross income minus:
- Gross pension contributions (if paid net to a pension scheme)
- Gift Aid donations (grossed up)
- Some other reliefs
Importantly, ANI is NOT reduced by income tax or NI. A higher-earner close to the £100,000 taper zone can use ANI optimisation to restore Personal Allowance.
Taxable income
Income remaining after Personal Allowance, PSA, Dividend Allowance and other allowances have been deducted. See our full guide to taxable income.
Disposable income
Net income minus essential expenses (rent/mortgage, utilities, food, transport). The amount genuinely "free to spend or save." ONS uses a household-level version of this for national statistics.
Household income
Combined income of all adults in a household. Used by state benefits calculations (Universal Credit, tax credits) and some lender affordability assessments.
Passive income
Informal term (not a UK tax category). Usually means income from investments, rental property, royalties, or similar — where ongoing work isn't required. HMRC generally classes this as unearned income.
Why the distinction matters
UK tax rates apply differently to different income types:
| Income type | Income tax | National Insurance | Allowance |
|---|---|---|---|
| Employment | 20% / 40% / 45% | 8% / 2% | Personal Allowance |
| Self-employment | 20% / 40% / 45% | Class 2 & Class 4 | Personal Allowance |
| Savings interest | 20% / 40% / 45% | None | Personal Savings Allowance |
| Dividends | 10.75% / 35.75% / 39.35% | None | Dividend Allowance |
| Rental | 20% / 40% / 45% | None | Property allowance (limited) |
| Pension | 20% / 40% / 45% | None | Personal Allowance |
This is why £50,000 of dividend income attracts less tax than £50,000 of salary income in the UK. Owner-managed company directors often take a low salary plus dividends for exactly this reason (though the gap has narrowed significantly since 2016).
Frequently asked questions
What is gross income?
Your total income before any deductions. For employees, it's your salary before tax and NI. For self-employed, it's typically turnover before expenses.
What's the difference between gross and net income?
Gross = before deductions. Net = after deductions. For employees, net is your take-home pay. For self-employed, net profit is turnover minus business expenses.
Is pension income earned or unearned?
HMRC treats it as earned income (taxed at normal rates with Personal Allowance) but not subject to National Insurance.
What does "adjusted net income" mean?
HMRC's specific calculation used for Personal Allowance taper and Child Benefit High Income Charge. Gross income minus pension contributions and Gift Aid (grossed up). NOT reduced by income tax.
Are dividends earned or unearned income?
Unearned. Dividends are taxed at different (lower) rates than salary, with their own £500 Dividend Allowance, and no National Insurance.
Is passive income a formal UK tax category?
No, it's informal. HMRC doesn't use "passive income" as a formal term. Most types of passive income fall under "unearned" or "investment" income in tax terms.
Quick links
- UK Tax Guide 2026/27
- What is Taxable Income? UK Guide
- UK Income Tax Rates & Bands
- UK Personal Allowance
- UK Personal Savings Allowance
- UK Income Tax Calculator
