What is income tax?
Income tax is charged by HMRC on most forms of income you receive: wages, self-employment profits, rental income, interest, and dividends. The amount you pay depends on how much you earn and which tax band your income falls into.
The personal allowance
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Calculate your income tax & NI →Every UK resident gets a tax-free personal allowance — income you can earn before paying any tax. For 2025–26 it is £12,570. It has been frozen at this level since 2021 and won't change until at least 2028.
If your income is above £100,000, your personal allowance starts to reduce: you lose £1 of allowance for every £2 you earn above £100k. Once your income hits £125,140 your personal allowance has been wiped out entirely.
2025–26 income tax bands (England, Wales & Northern Ireland)
| Band | Taxable income | Tax 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 60% effective tax trap
Earners between £100,000 and £125,140 face a hidden 60% effective tax rate. That's because every extra £2 of income loses £1 of personal allowance, which is then taxed at 40% — on top of the 40% higher-rate tax already due. The practical result: you keep only £0.40 in every additional £1 earned in that range.
One of the most effective ways to escape this trap is to make pension contributions — these reduce your "adjusted net income" and can restore your personal allowance pound for pound.
Scotland rates (different)
Scottish taxpayers pay different income tax rates on non-savings, non-dividend income. For 2025–26:
| Band | Taxable income | Tax rate |
|---|---|---|
| Starter rate | £12,571 – £14,876 | 19% |
| Scottish basic rate | £14,877 – £26,561 | 20% |
| Intermediate rate | £26,562 – £43,662 | 21% |
| Higher rate | £43,663 – £75,000 | 42% |
| Advanced rate | £75,001 – £125,140 | 45% |
| Top rate | Over £125,140 | 48% |
The personal allowance and its taper work the same way in Scotland. NI rates are not devolved and are the same across the UK.
What counts as taxable income?
Not all money you receive is taxable. Taxable income includes: employment income (salary, bonuses, benefits in kind), self-employment profits, rental profits, pension income, and most interest and dividends above their respective allowances.
Tax-free income includes: ISA interest and dividends, the first £1,000 of savings interest for basic-rate taxpayers (£500 for higher-rate), the first £500 of dividends, and statutory redundancy pay up to £30,000.
How PAYE works
If you're employed, your employer deducts tax and National Insurance each pay period under the Pay As You Earn (PAYE) system. Your tax code tells your employer how much of your income is tax-free. The standard code for 2025–26 is 1257L, representing the £12,570 personal allowance.
If you have other income, HMRC adjusts your tax code to collect extra tax through PAYE, or you may need to file a Self Assessment return.
Checking your tax position
If you're employed and on a standard tax code with no other income, you're very likely paying the right amount of tax automatically. If you're self-employed, a director, or have income from multiple sources, you'll need to file a Self Assessment return by 31 January each year.