How it works
How UK Income Tax works in 2025/26
Income Tax in the UK is banded and progressive — you pay each rate only on the slice of income that falls within the band. Most employees never fill in a tax return because PAYE (Pay As You Earn) handles everything through their payslip. Self-employed, landlords and high earners file a Self Assessment return each January.
The UK-wide bands below apply to England, Wales and Northern Ireland. Scotland sets its own rates and thresholds — see the Scottish section later.
| Band | Taxable income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
The personal allowance taper
Once you earn more than £100,000, your tax-free personal allowance shrinks by £1 for every £2 above the threshold. At £125,140 it vanishes entirely. This creates a notorious 60% effective marginal rate on the £100,000–£125,140 slice — you pay 40% Income Tax and lose 20% of personal allowance worth of tax-free income on top.
A common move: if you earn £110,000, making a £10,000 gross pension contribution brings you back under £100,000 and restores the full allowance — a remarkable effective rate of saving.
Worked examples
£35,000 a year (basic-rate only)
Taxable income = 35,000 − 12,570 = £22,430.
All in the basic-rate band × 20% = £4,486 Income Tax.
Effective tax rate: 12.8% of gross.
£65,000 a year (crosses into higher-rate)
Personal allowance 12,570 at 0% = £0.
Basic-rate 50,270 − 12,570 = 37,700 × 20% = £7,540.
Higher-rate 65,000 − 50,270 = 14,730 × 40% = £5,892.
Total Income Tax = £13,432 — 20.7% of gross.
£120,000 a year (inside the taper trap)
Reduced personal allowance: 12,570 − (120,000 − 100,000)/2 = 12,570 − 10,000 = £2,570.
Basic-rate: 50,270 − 2,570 = 47,700 × 20% = £9,540.
Higher-rate: 120,000 − 50,270 = 69,730 × 40% = £27,892.
Total = £37,432 — 31.2% effective rate.
Scotland: different rates, different thresholds
Scottish Income Tax uses five bands for 2025/26 (starter, basic, intermediate, higher, advanced, top). The personal allowance remains UK-wide.
| Band | Scottish taxable income | Rate |
|---|---|---|
| Starter | £12,571 – £14,876 | 19% |
| Basic | £14,877 – £26,561 | 20% |
| Intermediate | £26,562 – £43,662 | 21% |
| Higher | £43,663 – £75,000 | 42% |
| Advanced | £75,001 – £125,140 | 45% |
| Top | Above £125,140 | 48% |
What counts as taxable income
- Employment income — salary, bonuses, benefits-in-kind, tips.
- Self-employed profit — turnover minus allowable expenses.
- Rental income — after allowable expenses, with the property allowance or £1,000 trading allowance available.
- Pension income — state pension, workplace pension, personal pension drawdown (25% lump sum is tax-free).
- Interest — above the Personal Savings Allowance (£1,000 basic, £500 higher, £0 additional rate).
- Dividends — above the £500 Dividend Allowance, taxed at 8.75%/33.75%/39.35% for the three bands.
Reliefs, allowances and tax codes
Most people see a tax code like 1257L — it simply means a £12,570 personal allowance applied monthly or weekly. Codes ending in K (negative allowance, typically for untaxed benefits), T (review required), or BR (basic rate on all income — common for a second job) warrant a quick check.
Key non-PAYE reliefs worth knowing:
- Marriage Allowance — transfer £1,260 of unused allowance from a non-taxpayer spouse to a basic-rate earner, saving up to £252/year.
- Pension contributions — up to £60,000 or 100% of earnings a year at your marginal rate.
- Gift Aid — add-back: higher-rate donors can reclaim 25p per £1 donated via Self Assessment.
- Trading and Property allowances — £1,000 of gross side-hustle or rental income is tax-free.
Reading your tax code — every letter decoded
The tax code is a cryptic-looking string on your payslip, but every character has a purpose. Understanding yours lets you spot HMRC mistakes that cost hundreds of pounds a year.
- The number — divide by ten to see your personal allowance. 1257 means £12,570; 1000 means £10,000 (because of a benefit in kind reducing it).
- L — you get the standard personal allowance. The default for most employees.
- M and N — Marriage Allowance received (M) or given away (N). M usually adds £1,260 to your allowance.
- T — includes other calculations, often because income is close to the £100,000 taper. HMRC has flagged it for review each year.
- K — negative allowance. Your taxable benefits exceed your personal allowance, typically because of a large company-car benefit. Tax is deducted from the first pound.
- BR — every pound is taxed at basic rate (20 %). Used for a second job where the first job already uses the allowance.
- D0 / D1 — 40 % / 45 % on the whole income, used for third jobs or very high earners.
- NT — no tax deducted. Commonly seen for overseas Crown servants or ministers of religion.
- S / C prefix — Scottish / Welsh rates. You will see S1257L or C1257L depending on where you live.
- W1 / M1 / X — "week 1 / month 1" emergency basis. Your tax is recalculated from scratch each pay period rather than cumulatively. Usually temporary; check your final payslip in March.
National Insurance sits alongside Income Tax
Income Tax is only half the story for a UK worker. National Insurance (NI) is a separate tax on earnings that funds state benefits and the state pension. For 2025/26, employees pay Class 1 NI at 8 % on earnings between £12,570 and £50,270, and 2 % on everything above. Self-employed people pay Class 2 (£3.45 a week) and Class 4 (6 %/2 %).
NI bands are aligned with Income Tax for the most part, but NI has no equivalent of the personal allowance taper, no 45 % higher rate and no Marriage Allowance. That makes the combined marginal rate on a basic-rate employee 28 %, on a higher-rate employee 42 %, and a slightly terrifying 62 % between £100,000 and £125,140 (40 % Income Tax + 20 % allowance taper + 2 % NI).
Self Assessment — who, when and why
Most employees never need to file Self Assessment because PAYE collects Income Tax through their payslip. But HMRC sends a notice to file if any of the following applies in a tax year.
- You earned more than £150,000 through employment.
- You are self-employed with gross turnover above £1,000 (the trading allowance).
- You are a company director drawing dividends outside PAYE.
- You earned more than £10,000 from savings interest or dividends.
- You received more than £2,500 of untaxed rental income (or gross rent above £10,000).
- You claim Child Benefit and either partner earns above £50,000 (High Income Child Benefit Charge).
- You made a capital gain above the Annual Exempt Amount (£3,000 for individuals in 2025/26).
- You want to claim marriage allowance, pension tax relief beyond basic rate, or Gift Aid higher-rate relief.
Three deeper worked examples
The three scenarios earlier covered PAYE basics. Here are three more awkward — but very common — situations that catch employees out, complete with the numbers.
£72,000 employee with £8,000 salary-sacrifice pension
Pensionable pay = 72,000 − 8,000 = £64,000. Personal allowance £12,570. Basic-rate slice 50,270 − 12,570 = 37,700 × 20 % = £7,540. Higher-rate slice 64,000 − 50,270 = 13,730 × 40 % = £5,492. Total Income Tax = £13,032, saving about £3,200 compared to paying the pension out of net salary.
£118,000 employee with Child Benefit for two kids
Taper reduces allowance to 12,570 − 9,000 = £3,570. Income Tax: basic 46,700 × 20 % = £9,340; higher 67,730 × 40 % = £27,092. Total = £36,432. On top, High Income Child Benefit Charge removes £2,075 of benefit (1 % per £200 of income between £60k and £80k — by 2025/26 the ceiling is £80k, so full clawback).
£48,000 landlord with £9,000 rental profit
Combined income £57,000 crosses into the higher rate band. Tax on employment alone: (50,270 − 12,570) × 20 % = £7,540. Tax on rental: the first (50,270 − 48,000) = £2,270 at 20 % = £454; the remaining £6,730 at 40 % = £2,692. Rental tax = £3,146. Total Income Tax = £10,686. This is the landlord's classic tax cliff, because cheaper mortgage interest no longer fully deducts.
Key tax-year dates you should not miss
UK tax deadlines are tight and penalty-heavy. Put these in your phone calendar today.
| Date | Event | Who it affects |
|---|---|---|
| 6 April 2025 | Start of 2025/26 tax year | Everyone — new allowances and bands apply |
| 31 July 2025 | Second payment on account due for 2024/25 | Self-employed, landlords |
| 5 October 2025 | Register for Self Assessment for 2024/25 | New self-employed, new landlords |
| 31 October 2025 | Paper Self Assessment deadline for 2024/25 | Anyone filing on paper |
| 30 December 2025 | Deadline to have SA tax collected via PAYE in 2026/27 | PAYE employees with small bills under £3,000 |
| 31 January 2026 | Online Self Assessment + payment deadline | All Self Assessment filers |
| 5 April 2026 | End of tax year — ISA and pension allowances reset | Anyone with savings or pensions |
Reliefs and allowances most PAYE workers miss
Even salaried employees can claim reliefs that quietly reduce their tax bill. HMRC will not chase you — you must apply.
Work-from-home tax relief
If your employer requires you to work from home (not just prefer it), you can claim £6 a week as tax relief — £312/year. At basic rate that's £62.40 back, at higher rate £124.80. Apply via the P87 form or the online HMRC service.
Professional subscriptions
Membership fees for approved professional bodies — the ICAEW, GMC, NMC, Law Society, RIBA, and hundreds more — are tax-deductible. Check the full HMRC list 3 (approved professional organisations) before claiming.
Uniform and tool allowances
Nurses, mechanics, police officers, and many trades can claim a flat-rate expense for washing uniforms or buying small tools. The amounts are modest (£60–£140/year typically) but they stack up across a career and can be backdated four tax years.
Marriage Allowance
If one spouse earns under the Personal Allowance and the other is a basic-rate taxpayer, transfer £1,260 of allowance and save up to £252/year. It's the simplest five-minute tax win in the UK system.
Pension contribution relief for higher-rate taxpayers
Personal pension contributions already get 20 % relief automatically at source. Higher-rate (40 %) and additional-rate (45 %) taxpayers must claim the extra 20 % or 25 % back via Self Assessment. Skipping this step leaves thousands of pounds on the table over a career.
Capital Gains, dividends, and savings — the other tax streams
Income Tax is only one of five main taxes on personal finances. A quick map helps you avoid surprises.
- Capital Gains Tax (CGT) — on profit from selling assets. Annual exempt amount £3,000 in 2025/26. Residential property gains 18 %/24 %, other assets 10 %/20 %.
- Dividend tax — first £500 covered by the Dividend Allowance, then 8.75 %/33.75 %/39.35 % depending on your tax band.
- Savings interest — Personal Savings Allowance £1,000 (basic), £500 (higher), £0 (additional). Above that, interest is taxed at your marginal rate.
- Inheritance Tax (IHT) — typically 40 % on estates above the £325,000 nil-rate band, with reliefs for spouses and main homes passing to direct descendants.
- Stamp Duty Land Tax (SDLT) — paid by the buyer on property purchases above certain thresholds.