How UK Income Tax Works

A straightforward guide to understanding the UK tax system, how your income is taxed, and what you actually take home from your salary.

If you've ever looked at your payslip and wondered where all your money goes, you're not alone. Income tax can seem confusing, but once you understand the basics, it's actually quite straightforward. This guide will explain how the UK income tax system works in plain English, without the jargon.

The Basics: What is Income Tax?

Income tax is money taken from your earnings to fund public services like the NHS, schools, police, and infrastructure. In the UK, most employees pay income tax automatically through a system called PAYE (Pay As You Earn), which means your employer deducts it before you receive your salary.

Key Principle: Progressive Taxation

The UK uses a progressive tax system. This means that the more you earn, the higher percentage of tax you pay on some of your income. However, it's crucial to understand that you don't pay the higher rate on all your income - only on the portion that falls into higher tax bands.

Simple analogy:

Think of your income as water filling up buckets. The first bucket (personal allowance) has no tax. The second bucket (basic rate) has 20% taken out. The third bucket (higher rate) has 40% taken out. You only pay tax on each bucket, not on all the water at the highest rate.

Step 1: Your Personal Allowance

Before any tax is calculated, everyone gets a personal allowance. This is the amount of money you can earn each year completely tax-free.

2025-2026 Personal Allowance

£12,570

Tax-free income per year

What this means:

• If you earn £12,570 or less per year, you pay NO income tax
• If you earn more than £12,570, you only pay tax on the amount above this
• This allowance reduces if you earn over £100,000 (more on this later)

Step 2: Understanding Tax Bands

After your personal allowance, the rest of your income is divided into "bands", with each band taxed at a different rate.

20%Basic Rate Band

Income from £12,571 to £50,270

Most people's income falls into this band. For every £100 you earn in this band, you pay £20 in tax and keep £80.

Example:

If you earn £30,000 per year:
• First £12,570: £0 tax (personal allowance)
• Next £17,430 (£12,571 - £30,000): £3,486 tax (20%)
• Total tax: £3,486

40%Higher Rate Band

Income from £50,271 to £125,140

Once your income exceeds £50,270, you start paying 40% on the amount above this threshold. Remember: you still pay 0% on the first £12,570 and 20% on the next portion.

Example:

If you earn £60,000 per year:
• First £12,570: £0 tax
• Next £37,700 (£12,571 - £50,270): £7,540 tax (20%)
• Next £9,730 (£50,271 - £60,000): £3,892 tax (40%)
• Total tax: £11,432

45%Additional Rate Band

Income above £125,140

The highest rate of income tax applies to earnings above £125,140. At this income level, you also lose your entire personal allowance.

How Tax is Actually Collected: PAYE

If you're an employee, you don't need to calculate or pay your tax yourself. Your employer does this through PAYE (Pay As You Earn).

How PAYE Works

1
HMRC gives your employer a tax code
This code tells them how much tax-free allowance you have. The standard code for 2025-2026 is 1257L (representing the £12,570 personal allowance).
2
Your employer calculates tax each pay period
They work out how much tax you should pay based on your earnings and tax code, spreading your allowance across the year.
3
Tax is deducted from your salary
Before you receive your pay, the tax is deducted and sent directly to HMRC.
4
You receive your net (take-home) pay
This is your salary after tax and National Insurance have been deducted.

Common Situations Explained

Starting a New Job

When you start a new job, give your employer your P45 from your previous job. This tells them how much you've earned and how much tax you've paid so far this tax year. If you don't have a P45 (e.g., it's your first job), you'll fill in a starter checklist instead.

Without a P45, you might temporarily pay too much or too little tax, but this is usually corrected automatically within a few pay periods.

Multiple Jobs

Your personal allowance is usually applied to your main job (the one that pays most). Your second job typically has a BR (Basic Rate) tax code, meaning you pay 20% on all earnings from that job with no personal allowance.

You only get one personal allowance across all your jobs, but it's split between them.

Getting a Pay Rise or Bonus

When you get a pay rise or bonus, you don't pay the higher rate of tax on your entire salary - only on the additional amount if it pushes you into a higher band. Many people worry they'll take home less after a pay rise, but this never happens with income tax alone.

Example:

If you earn £49,000 and get a £5,000 raise to £54,000, you'll pay 40% on the £3,730 above £50,270, not on your entire £54,000 salary.

It's Not Just Income Tax

Income tax is only part of what's deducted from your salary. You'll also pay:

National Insurance

A separate tax that funds state benefits like the NHS and state pension. You pay 8% on earnings between £12,570 and £50,270, then 2% above that.

Learn more about National Insurance →

Student Loan Repayments

If you have a student loan, repayments are automatically deducted from your salary once you earn above the threshold for your loan plan type.

Learn more about student loans →

Pension Contributions

Most employers automatically enroll you in a workplace pension. Contributions are typically deducted from your salary before tax, which reduces your tax bill.

Other Deductions

You might also have deductions for things like childcare vouchers, cycle to work schemes, or union subscriptions.