UK Income Tax Explained (2025/26)

How UK tax works (PAYE in plain English)

PAYE (Pay As You Earn) is the system used in the UK to collect income tax and National Insurance from your salary before you receive it. When you're employed, your employer deducts tax and National Insurance from your pay each month or week, and sends it directly to HMRC (His Majesty's Revenue and Customs). This means you don't need to file a tax return for most employment income – it's all handled automatically.

Your taxable income is the amount you earn above your Personal Allowance of £12,570 (the tax-free amount you can earn each year). The UK uses a progressive tax system, which means different portions of your income are taxed at different rates. The first £12,570 is tax-free (your Personal Allowance), then you pay 20% on the next portion, 40% on the portion above that, and 45% on the highest portion.

Your marginal tax rate is the rate you pay on the last pound you earn. For example, if you earn £55,000 per year, your marginal rate is 40% because the last portion of your income falls into the higher rate band. This is important to understand because any additional income (like a bonus or overtime) will be taxed at your marginal rate, not your average rate.

PAYE spreads your tax liability across the year, so you pay roughly the same amount each month. However, if your income changes significantly (for example, if you get a bonus or change jobs), your tax may be adjusted to ensure you pay the correct amount for the full tax year.

UK income tax bands (2025/26)

UK income tax is calculated using bands. This means you don't pay the same rate on all your income – instead, different portions are taxed at different rates. The concept is simple: you have a tax-free Personal Allowance of £12,570, then each additional portion of income is taxed at progressively higher rates.

For England, Wales, and Northern Ireland, there are three main tax rates above the Personal Allowance:

• Basic rate: 20% on income from £12,571 to £50,270
• Higher rate: 40% on income from £50,271 to £125,140
• Additional rate: 45% on income above £125,140

It's important to understand that earning more doesn't mean all your income is taxed at the higher rate. Only the portion of your income that falls into each band is taxed at that rate. For example, if you earn £60,000, you'll pay 0% on your Personal Allowance (£12,570), 20% on the basic rate band (£12,571 to £50,270), and 40% only on the portion above £50,270.

Scotland uses different income tax bands and rates. Scottish taxpayers pay income tax using a different structure with more bands and different rates. If you're a Scottish taxpayer, your employer will use the Scottish rates automatically based on your address.

Personal Allowance and what reduces it

The Personal Allowance is the amount of income you can earn each tax year before you start paying income tax. For the 2025/26 tax year, the standard Personal Allowance is £12,570.

However, your Personal Allowance can be reduced if you earn above £100,000. This is called the high-income taper. For every £2 you earn above £100,000, your Personal Allowance is reduced by £1. This continues until your Personal Allowance is reduced to £0 at an income of £125,140.

For example, if you earn £110,000, you earn £10,000 above the £100,000 threshold. Your Personal Allowance is reduced by £5,000 (half of £10,000), leaving you with £7,570. If you earn £125,140 or more, your Personal Allowance is reduced to £0.

Your Personal Allowance can also be reduced if you have benefits in kind (like a company car or private healthcare), if you owe tax from previous years, or if HMRC has issued you with a K code (which means you have additional income that hasn't been taxed). Your tax code reflects your Personal Allowance – the standard code 1257L means you get the full Personal Allowance of £12,570, while other codes indicate adjustments.

Common reasons your tax code might change include: starting a new job, having multiple jobs, receiving benefits in kind, underpaying tax in previous years, or having other sources of income. If your tax code changes, you should receive a notice from HMRC explaining why.

National Insurance (NI): why it's separate from income tax

National Insurance is a separate deduction from income tax, even though both are taken from your pay through PAYE. While they might seem similar, they serve different purposes and are calculated using different rules.

Income tax funds general government spending (the NHS, education, defence, infrastructure, and other public services). National Insurance, on the other hand, funds specific state benefits like the State Pension, Jobseeker's Allowance, Employment and Support Allowance, and statutory sick pay. Your NI contributions also determine your eligibility for certain benefits.

Employee National Insurance (Class 1) is calculated on your earnings above the Primary Threshold. In 2025/26 the Primary Threshold is £12,570 per year (also shown as weekly/monthly thresholds on payslips), and NI is assessed per pay period. The main rate is 8% up to the Upper Earnings Limit of £50,270, then 2% above that. Because NI uses its own thresholds and is calculated per pay period, it won't always 'feel' the same as income tax month to month.

If you're self-employed, you pay Class 2 and Class 4 National Insurance instead, which have different rates and thresholds. Self-employed NI is calculated and paid separately through your Self Assessment tax return.

The combination of income tax and National Insurance means your effective tax rate (the total percentage of your income that goes to tax and NI) can be higher than the income tax rate alone. This is why understanding both is important when calculating your take-home pay.

PAYE tax codes and emergency tax

Your tax code tells your employer how much tax-free income you're entitled to and how much tax to deduct from your pay. The standard tax code for 2025/26 is 1257L, which gives you the full Personal Allowance of £12,570. The number represents your tax-free allowance divided by 10 (so 1257 means £12,570), and the letter indicates your circumstances.

Common tax code letters include: L (standard Personal Allowance), M (you've received 10% of your partner's Personal Allowance), N (you've transferred 10% of your Personal Allowance to your partner), T (your Personal Allowance needs to be reviewed), and K (you have additional income that hasn't been taxed, so tax is deducted from your pay to cover it).

Emergency tax codes are temporary codes used when HMRC doesn't have enough information about your income. They're applied when you start a new job, have multiple jobs, or your circumstances change. Emergency tax codes often end in W1 (week 1) or M1 (month 1), which means your tax is calculated on that pay period only, without considering your previous earnings in the tax year.

If you're on an emergency tax code, you may overpay tax initially because you're not getting the benefit of your full Personal Allowance spread across the year. Once HMRC has the correct information, they'll issue the right tax code and you'll usually get a refund automatically, or your tax will be adjusted in future pay periods.

Quick checks:

• Check your tax code on your payslip – it should match what HMRC has sent you
• If your code ends in W1 or M1, you may be on emergency tax
• If your code starts with K, you have additional untaxed income
• You can check your tax code online through your personal tax account on GOV.UK

How take-home pay is calculated

Your take-home pay (also called net pay) is the amount you actually receive after all deductions. Understanding how it's calculated helps you make sense of your payslip and plan your finances.

Here's the step-by-step process:

1. Gross pay: This is your total earnings before any deductions – your salary, plus any bonuses, commission, or overtime.
2. Taxable pay: This is your gross pay minus any pension contributions (if made before tax) and minus your Personal Allowance of £12,570 (spread across the year).
3. Income tax: Calculated on your taxable pay using the progressive tax bands (20% on income from £12,571 to £50,270, 40% on income from £50,271 to £125,140, or 45% on income above £125,140).
4. National Insurance: Calculated separately on your gross pay (after pension contributions if salary sacrifice) above the primary threshold of £12,570, at 8% between £12,570 and £50,270, then 2% above £50,270.
5. Pension contributions: If you're in a workplace pension, your contribution is deducted. This may be taken before or after tax depending on your pension scheme.
6. Student loan repayments: If you have a student loan, repayments are calculated as a percentage of your earnings above the threshold for your plan (Plan 1, 2, 4, or Postgraduate Loan).
7. Net pay (take-home): Your gross pay minus all the deductions above.

Example: If you earn £40,000 per year gross, and your Personal Allowance is £12,570, your taxable income is £27,430. You'd pay 20% income tax on this (£5,486), plus National Insurance on earnings above £12,570. After all deductions, your take-home pay would be less than your gross pay, but the exact amount depends on your pension contributions, student loans, and other factors.

Remember that these calculations are spread across the year, so if you're paid monthly, you'll see roughly one-twelfth of the annual amounts deducted each month. However, if you receive a bonus or work overtime, the additional income may be taxed at your marginal rate in that pay period, which can make your take-home pay vary month to month.

Take-home pay after tax and National Insurance (NI)

Your take-home pay after tax and National Insurance is your net pay – the amount you actually receive in your bank account. This is your gross pay minus income tax, minus National Insurance, and minus any other deductions like pension contributions or student loan repayments.

It's important to remember that National Insurance is separate from income tax. Both are calculated independently using different thresholds and rates, which is why your total deductions are the sum of income tax plus NI (plus any other deductions).

Because deductions are assessed per pay period (monthly or weekly), your take-home pay can vary from one pay period to the next. This is especially true if you receive bonuses, work overtime, or if your tax code changes. The calculations are designed to spread your annual tax liability across the year, but variations in income can cause fluctuations in your net pay.

For more detailed information about take-home pay, wages after tax, and how to use our take-home pay calculator, see our dedicated guides.

Common scenarios that change your tax

Your tax isn't always straightforward – various situations can affect how much you pay. Here are some common scenarios and how they impact your tax:

Bonus and commission

Bonuses and commission are added to your regular salary and taxed at your marginal rate (the highest rate of tax you pay). This means if you're a basic rate taxpayer, a bonus is taxed at 20%, but if the bonus pushes you into the higher rate band, the portion above the threshold is taxed at 40%.

• Bonuses are paid in a single pay period, which can make your tax appear higher that month
• Your employer may use a special calculation method that can result in temporary over-taxation, which is usually corrected automatically
• Large bonuses can push you into a higher tax band for the year, affecting your overall tax liability

Calculate tax on your bonus

Overtime

Overtime is subject to income tax and National Insurance just like your regular salary. It's added to your total taxable income for the tax year, so if overtime pushes you into a higher tax band, you'll pay tax at that higher rate on the overtime portion.

• Overtime doesn't get a special tax rate – it's taxed based on your total income
• If overtime pushes you into a higher band, only the portion above the threshold is taxed at the higher rate
• Regular overtime can significantly increase your annual income and tax liability

Use our Tax Calculator to estimate the impact of overtime on take-home pay.

Second job

If you have a second job, your Personal Allowance is applied to your main job only. Your second job will be taxed at the basic rate (20%) from the first pound, unless you earn enough across both jobs to reach the higher rate threshold.

• You'll have separate tax codes for each job – your main job gets your Personal Allowance, your second job usually gets a BR (basic rate) code
• Your total income across both jobs determines which tax bands you fall into
• You may need to complete a Self Assessment if your tax situation is complex

Use our Tax Calculator to estimate deductions across multiple jobs.

Salary sacrifice and pensions

Salary sacrifice allows you to exchange part of your salary for pension contributions or other benefits. This reduces your taxable income, so you pay less income tax and National Insurance. The amount you sacrifice isn't subject to tax or NI, which can increase your take-home pay depending on your circumstances.

• Salary sacrifice reduces both your income tax and National Insurance contributions
• You may see an increase in take-home pay because you're saving on both tax and NI
• The pension contribution is made before tax, so you get full tax relief

Calculate salary sacrifice impact

Student loan (overview)

If you have a student loan, repayments are deducted from your pay once you earn above the threshold for your plan. Repayments are calculated as a percentage of your earnings above the threshold, not your total income.

• Student loan repayments are separate from income tax and National Insurance
• Different plans have different thresholds and rates (Plan 1, 2, 4, or Postgraduate Loan)
• Repayments continue until your loan is paid off or written off (depending on your plan)
• Repayments are calculated on your gross pay before tax, but after pension contributions in some cases

UK tax FAQs

Tax tools and calculators

Use our free calculators to work out your exact tax liability and take-home pay: