UK Income Tax Explained: Complete Guide for 2025-2026
Everything you need to know about how income tax works in the UK, including tax bands, rates, personal allowance, and the dreaded 60% tax trap for high earners.
Income tax is one of the largest deductions from your salary, yet many people don't fully understand how it works. The UK operates a progressive tax system, which means you don't pay a single rate on your entire income. Instead, your income is divided into bands, with each band taxed at a different rate.
This guide will walk you through everything you need to know about UK income tax for the 2025-2026 tax year, including how to calculate your tax bill, what the different bands mean, and some of the quirks in the system that can dramatically affect high earners.
Key Thresholds
- Personal Allowance:£12,570
- Higher Rate Starts:£50,270
- Additional Rate Starts:£125,140
- Allowance Taper Starts:£100,000
Tax Rates
- Personal Allowance:0%
- Basic Rate:20%
- Higher Rate:40%
- Additional Rate:45%
How Income Tax Works
The UK uses a progressive tax system, which means higher earners pay a higher percentage of their income in tax. However, it's important to understand that you don't pay the higher rate on your entire income - only on the portion that falls within each band.
- 1Start with your gross income
This is your total income before any deductions. For employees, this is usually your annual salary. For the self-employed, it's your profit after business expenses.
- 2Deduct your personal allowance
Subtract £12,570 from your income (unless you earn over £100,000, in which case your allowance is reduced). This portion is tax-free.
- 3Apply tax rates to each band
Your remaining income is taxed at 20% (basic rate), 40% (higher rate), and 45% (additional rate) depending on which bands it falls into.
- 4Add up all the tax from each band
The total is your annual income tax bill. For employees, this is automatically deducted through PAYE (Pay As You Earn).
Example: £45,000 Salary
Example: £75,000 Salary
Income Tax Bands Explained
England, Wales, and Northern Ireland use a four-band income tax system. Scotland has its own system with six bands (see our Scottish income tax guide).
The personal allowance is the amount you can earn completely tax-free each year. For 2025-2026, this is set at £12,570. Everyone gets this allowance, but it can be reduced or eliminated for high earners (see personal allowance taper below).
Anyone earning less than £100,000 per year gets the full £12,570 allowance. If you earn between £100,000 and £125,140, your allowance is gradually reduced. Above £125,140, you get no personal allowance.
The basic rate band is where most people's income sits. You pay 20% tax on income in this band. This means for every £100 you earn in this band, you keep £80 and pay £20 in tax.
If all your taxable income (after personal allowance) falls within this band, you're considered a basic rate taxpayer. This affects:
- • How much tax relief you get on pension contributions
- • Whether you pay tax on dividends (first £500 is tax-free, then 8.75%)
- • Capital gains tax rate (10% for most assets, 18% for property)
Once your income exceeds £50,270, you enter the higher rate tax band. You pay 40% on income within this band. Note that you still pay 0% on the first £12,570 and 20% on £12,571-£50,270 - the 40% rate only applies to income above £50,270.
As a higher rate taxpayer:
- • You get 40% tax relief on pension contributions (very valuable)
- • Dividends are taxed at 33.75% (after £500 allowance)
- • Capital gains tax is 20% for most assets, 24% for property
- • You lose Child Benefit if you earn over £60,000 (fully lost at £80,000)
- • Tax-free childcare becomes less valuable or unavailable
The additional rate applies to all income above £125,140. At this level, you also lose your entire personal allowance, meaning every pound earned is taxed. The 45% rate is the headline rate, but because you've lost your personal allowance, your effective marginal rate between £100,000-£125,140 is actually higher (see below).
At this income level:
- • You get 45% tax relief on pension contributions
- • Dividends are taxed at 39.35%
- • You have no personal allowance
- • You lose all Child Benefit
- • You're not eligible for tax-free childcare
The Personal Allowance Taper: The 60% Tax Trap
One of the most punishing parts of the UK tax system is the personal allowance taper, which creates an effective marginal tax rate of 60% for earners between £100,000 and £125,140. This is higher than the top rate of income tax!
For every £2 you earn above £100,000, you lose £1 of your personal allowance. Since the personal allowance is £12,570, it completely disappears when you earn £100,000 + (£12,570 × 2) = £125,140.
- • You pay 40% higher rate tax on the income itself
- • You lose £1 of personal allowance for every £2 earned
- • That lost £1 of allowance would have been taxed at 40%, costing you an extra £0.40
- • But it only took £2 of income to lose it, so the extra tax is £0.40 / £2 = 20%
- • Total: 40% + 20% = 60% effective marginal rate
Example: £110,000 Salary
Allowance lost: £10,000 ÷ 2 = £5,000
Remaining allowance: £12,570 - £5,000 = £7,570
If you earned £10,000 less (£100,000), you'd pay £27,432 in tax.
That extra £10,000 cost you £5,000 in tax - a 50% rate (average for the band).
The marginal rate on each pound between £100k-£125k is 60%.
If you're earning in the £100,000-£125,140 range, there are legitimate ways to reduce your taxable income and reclaim your personal allowance:
- ✓Pension contributions: Making pension contributions via salary sacrifice reduces your gross income. Putting £10,000 into a pension when earning £110,000 brings you back to £100,000, saving you £6,000 in tax (60% of £10,000).
- ✓Charitable donations: Gift Aid donations reduce your taxable income. A £10,000 donation when earning £110,000 saves £6,000 in tax.
- ✓Salary sacrifice schemes: Childcare vouchers (if still in an existing scheme), cycle to work, or electric car schemes reduce your gross income.
- ✓Defer income: If you're self-employed or have control over when you receive bonuses, consider spreading income across tax years.
Marginal vs Effective Tax Rate
Understanding the difference between marginal and effective tax rates is crucial for making financial decisions.
Your marginal tax rate is the percentage of tax you pay on your next pound of income. It's the rate that applies to your highest income.
Use this for: Deciding whether to work overtime, accept a pay rise, or make additional pension contributions.
Your effective tax rate is your total tax divided by your total income. It's the average rate you pay across all your income.
Use this for: Understanding your overall tax burden and comparing your situation with others.
| Income | Income Tax | National Insurance | Total (no student loan) | With Plan 2 Loan |
|---|---|---|---|---|
| £10,000 | 0% | 0% | 0% | 0% |
| £20,000 | 20% | 8% | 28% | 28% |
| £35,000 | 20% | 8% | 28% | 37% |
| £55,000 | 40% | 2% | 42% | 51% |
| £110,000 | 60% | 2% | 62% | 71% |
| £150,000 | 45% | 2% | 47% | 56% |
Note: Student loan repayments apply above the threshold. Plan 2 threshold is £29,385 with a 9% rate.
Calculate Your Income Tax
Use our free salary calculator to see exactly how much income tax you'll pay on your salary for 2025-2026, plus National Insurance, student loans, and pension deductions.
Calculate My Take-Home PayFrequently Asked Questions
No. You don't pay income tax on your personal allowance (£12,570), and certain types of income are tax-free including ISA interest, premium bond wins, betting and lottery winnings, and the first £1,000 of income from self-employment or property (trading allowance and property allowance).
It depends. You usually get the personal allowance if you're a British citizen, a citizen of an EEA country, or you worked for the UK government at some point in the tax year. If you don't meet these criteria, you may not get any personal allowance and all UK income is taxed from the first pound.
Your personal allowance is usually applied to your main job (the one with tax code 1257L). Your second job typically has a BR (Basic Rate) tax code, meaning you pay 20% on all income from that job. If your total income exceeds £50,270, you may owe additional tax through self-assessment.
PAYE (Pay As You Earn) is calculated on a cumulative basis throughout the tax year. When you start a job, your employer will use your P45 or calculate your allowances from the start of the tax year. This may mean you get a bigger personal allowance in your first few pay packets to "catch up" on the allowance you should have received earlier in the year.
Gross income is your total income before any deductions (income tax, National Insurance, pension, etc.). Net income (or take-home pay) is what you actually receive after all deductions. For example, a £50,000 gross salary might give you around £38,000 net after tax and National Insurance.
Yes, if their total income (including state pension, private pensions, and other income) exceeds their personal allowance. However, those born before 6 April 1935 may get a higher personal allowance. State pension income counts towards your taxable income, but it's paid gross (without tax deducted), so you may need to pay tax through self-assessment or PAYE if you have other pension income.