What is included in the adjusted income formula for tax purposes?

The adjusted income formula for tax purposes is designed to ensure a comprehensive approach to determining an individual's taxable income. This includes not only net income but also contributions made by both the employee and the employer.

Net income serves as the starting point as it reflects the overall earnings of an individual. However, for tax purposes, it's essential to consider other forms of income that could affect the final taxable amount. Employee contributions and employer contributions to pension schemes or retirement accounts are significant because they can affect total tax liabilities through tax relief mechanisms and their treatment as taxable income.

Including employee and employer contributions broadens the scope of income under consideration, aligning more closely with the principle that all forms of income should be recognized when calculating adjusted income for tax liabilities. This allows tax authorities to capture the total financial picture of an individual.

In contrast, limiting the formula to only net income, or just employer contributions, would neglect critical components necessary for a full understanding of an individual's tax situation. Thus, the selection of a comprehensive approach that includes net income along with both employee and employer contributions provides a more accurate and fair assessment of taxable income.