UK Income Tax Explained: Bands, Rates and Your Tax-Free Allowance
Income tax is deducted from your wages before you see them, but most people don't fully understand how it's calculated. This guide explains exactly how UK income tax works, what the bands mean, and how to work out what you actually owe.
How income tax works
Income tax in the UK is charged on your income above a tax-free threshold called the Personal Allowance. You only pay tax on the amount above that threshold, and different portions of your income are taxed at different rates.
This is known as a progressive system. Moving into a higher rate band doesn't suddenly make all your income taxed at that higher rate. Only the portion that falls into that band is taxed at the higher rate.
Important: marginal vs average rate
If someone says "I'm a 40% taxpayer," they mean their top slice of income is taxed at 40%, not that 40% of everything they earn goes to HMRC. Most of their income is still taxed at 20% or is tax-free. Their average tax rate is always lower than their marginal rate.
Income tax bands 2026/27
These rates apply to England, Wales, and Northern Ireland. Scotland has its own separate bands set by the Scottish Parliament.
| 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% |
These bands have been frozen at 2021/22 levels until April 2028, which means fiscal drag pushes more earners into higher bands each year as wages rise.
The Personal Allowance
Everyone gets a Personal Allowance: the amount you can earn before paying any income tax. For 2026/27 this is £12,570. It applies automatically; you don't need to claim it.
Your Personal Allowance is reduced by £1 for every £2 you earn above £100,000. This means someone earning £125,140 or more has no Personal Allowance at all, and the effective tax rate on earnings between £100,000 and £125,140 is a punishing 60% (40% income tax + 20% loss of allowance).
The £100,000 trap
Earning £100,001 rather than £100,000 costs you considerably more than £1 in tax. Pension contributions can be an effective way to bring your income below £100,000 and recover the full Personal Allowance. It's worth doing the maths if you're close to this threshold.
Worked example: £45,000 salary
Here's how the tax is calculated on a £45,000 salary in 2026/27:
Note: this is income tax only. National Insurance, pension contributions, and student loan repayments are separate deductions.
National Insurance: the other big deduction
National Insurance (NI) is separate from income tax but deducted at the same time via PAYE. For employees in 2026/27:
| NI band | Earnings | Employee rate |
|---|---|---|
| Below lower limit | Up to £12,570/year | 0% |
| Main rate | £12,571 – £50,270/year | 8% |
| Above upper limit | Over £50,270/year | 2% |
Combined, income tax and employee NI mean a basic-rate taxpayer pays 28% on earnings between £12,570 and £50,270 (20% tax + 8% NI). A higher-rate taxpayer pays 42% on earnings above £50,270 (40% tax + 2% NI).
Understanding your tax code
Your tax code tells your employer how much of your pay to tax. The most common code is 1257L, meaning you have a Personal Allowance of £12,570 (multiply the numbers by 10). The letter indicates how your allowance should be applied:
If your tax code looks wrong, contact HMRC. An incorrect code can mean you're paying too much or too little tax, and underpayments accumulate as a debt to HMRC.
How to legally reduce your income tax
Pension contributions
Contributions into a registered pension reduce your taxable income. A higher-rate taxpayer contributing £1,000 into their pension effectively costs them £600 after 40% tax relief. Salary sacrifice also saves NI on top of this.
Marriage Allowance
If one partner earns below £12,570 and the other is a basic-rate taxpayer, the lower earner can transfer £1,260 of their Personal Allowance to their partner, saving up to £252/year in tax.
Gift Aid donations
Charitable donations under Gift Aid extend your basic rate band, meaning higher-rate taxpayers can reclaim the difference between higher-rate and basic-rate tax on their donations via Self Assessment.
ISAs for investment income
Interest and dividends earned inside an ISA are completely tax-free. Using your £20,000 annual ISA allowance reduces the taxable investment income you need to declare.
Common income tax questions
How does HMRC know what tax code to give me?
HMRC calculates your tax code based on information they already hold: your personal allowance, any benefits in kind your employer has reported, unpaid tax from previous years, and income from other sources. They then notify your employer to deduct the right amount through PAYE. If your circumstances change — you start receiving a company car, you have multiple jobs, or you begin drawing a pension — update HMRC via your Personal Tax Account to avoid getting the wrong code.
I have two jobs — how is tax calculated?
You only receive one personal allowance. HMRC typically assigns your full allowance to your main (higher-paying) job via a 1257L tax code, while your second job receives a BR (basic rate, 20%), D0 (higher rate, 40%), or D1 (additional rate, 45%) code. If your total income from both jobs keeps you in the basic rate band, the BR code is correct. You can ask HMRC to split the allowance if preferred.
Can I claim expenses against my income tax as an employee?
Yes, but the rules are strict. You can only deduct expenses you are required to incur as part of your employment that are not reimbursed by your employer. Common examples include professional subscriptions to bodies your employer requires you to join, specialist tools and equipment, and uniform cleaning costs. The HMRC P87 form lets you claim up to £2,500 in employment expenses without completing a full Self Assessment return.
What happens if I pay too much or too little tax during the year?
HMRC reconciles PAYE tax at year end. If you've overpaid, they'll send you a P800 refund notice and pay you back (usually within 45 days). If you've underpaid, they'll typically collect it by adjusting your tax code in the following year — spreading the recovery rather than demanding a lump sum — unless the underpayment is very large. Check your P60 after 5 April each year to confirm the total tax deducted matches your expectations.
Does pension income get taxed the same way as earned income?
Yes — private pension withdrawals are taxed as income at your marginal rate in the year you receive them, just like salary. The State Pension is also taxable, but it is paid gross (without PAYE deductions) so any tax owed is collected by adjusting your personal pension's tax code. Only the 25% tax-free lump sum from DC pensions (up to the £268,275 Lump Sum Allowance) is received without income tax.