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.