How UK Income Tax Works
A clear, practical guide to how income tax is calculated in the UK. If you have ever looked at your payslip and wondered where your money goes, this explains it.
The Personal Allowance
Everyone in the UK gets a personal allowance — the amount you can earn before paying any income tax. For the 2025/26 tax year, this is £12,570. If you earn less than this, you pay no income tax at all.
There is a catch for higher earners: if your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 above that threshold. By the time you reach £125,140, your personal allowance is zero, and every pound you earn is taxable.
Tax Bands Explained
Income tax in the UK is progressive, meaning different portions of your income are taxed at different rates. The bands for 2025/26 are:
| Band | Income Range | 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% |
A common misunderstanding is that moving into the higher rate band means all your income is taxed at 40%. It does not. Only the income above £50,270 is taxed at 40% — everything below that threshold is still taxed at the lower rates. This is why your effective tax rate is always lower than your marginal rate.
National Insurance
National Insurance is a separate deduction from income tax. Employees pay Class 1 NI at 8% on earnings between £12,570 and £50,270, and 2% on anything above. Your employer also pays NI on your behalf (15% above £5,000), but this does not appear on your payslip.
How PAYE Works
If you are employed, you rarely deal with HMRC directly. Your employer operates the Pay As You Earn (PAYE) system, deducting income tax and NI from your salary before paying you. Your tax code tells your employer how much personal allowance to give you. The standard code for 2025/26 is 1257L.
PAYE spreads your tax evenly across the year. In month one, you get one-twelfth of your annual personal allowance. This means your monthly take-home pay should be roughly the same each month, assuming your salary does not change.
A Worked Example
On a £35,000 salary:
- Personal allowance: £12,570 (no tax)
- Basic rate: 20% on £22,430 = £4,486
- NI: 8% on £22,430 = £1,794
- Total deductions: £6,280
- Take-home pay: £28,720 per year (£2,393/month)
You can check this using our salary calculator.
Frequently Asked Questions
Do I pay tax on all my income?
No. The first £12,570 you earn each year (your personal allowance) is tax-free. You only pay income tax on earnings above that threshold.
What is my tax code?
Your tax code tells your employer how much personal allowance to apply. The standard code 1257L means you get £12,570 tax-free. If yours is different, it may reflect benefits, underpaid tax from a previous year, or multiple income sources.
Is National Insurance the same as income tax?
No. They are separate deductions with different rates and thresholds, although they are both taken from your pay. Income tax funds general government spending, while NI contributes to your state pension entitlement and other benefits.
Do I need to file a tax return?
Most employees do not need to file a return because PAYE handles everything. You may need to file if you have additional income (rental, self-employment, dividends), earn over £150,000, or need to claim certain reliefs.
Important Disclaimer
The figures provided by this calculator are estimates based on the information you enter and published rates at the time of writing. They do not constitute financial, tax, or legal advice, and we accept no liability for decisions made on the basis of these estimates. Your actual liability may differ depending on your individual circumstances, applicable reliefs, and any changes to rates or legislation. Always consult a qualified professional or check the latest HMRC guidance at gov.uk before making financial decisions.