How UK Income Tax Works
PAYE, Tax Bands & National Insurance Explained
This guide covers 2025/26 tax year rates for England, Wales, Northern Ireland and Scotland. Use our free calculator to see your personal take-home pay figure.
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UK income tax is collected through PAYE (Pay As You Earn) — a system where your employer deducts tax and National Insurance directly from your salary before you are paid. For 2025/26, the Personal Allowance is £12,570, meaning the first £12,570 you earn is tax-free. Above that, basic rate tax of 20% applies up to £50,270, rising to 40% for earnings between £50,271 and £125,140, and 45% above £125,140.
What is PAYE?
PAYE — Pay As You Earn — is the system HMRC uses to collect income tax and National Insurance directly from your wages before your employer pays you. Rather than receiving a full gross salary and settling a tax bill each year, your employer deducts the right amount each pay period and sends it to HMRC on your behalf.
Your employer uses a tax code (such as 1257L) to work out how much to deduct. The number in the code is broadly your tax-free Personal Allowance divided by ten. If your code is wrong — for example after changing jobs — you may pay too much or too little tax during the year.
The Personal Allowance
The Personal Allowance is the amount you can earn each year before any income tax is charged. For 2025/26 it is £12,570.
The allowance tapers away for higher earners: you lose £1 of Personal Allowance for every £2 of income above £100,000. By the time your income reaches £125,140 the allowance has been completely withdrawn — meaning income between £100,000 and £125,140 is effectively taxed at 60% (40% income tax plus the 20% lost by withdrawing the allowance).
If your income is close to £100,000, making pension contributions can bring your adjusted net income below the threshold and restore your Personal Allowance — a very effective tax strategy.
Income Tax Bands 2025/26
Income above your Personal Allowance is taxed in bands. The bands below apply in England, Wales and Northern Ireland.
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Personal Allowance (0%): £0 – £12,570
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Basic rate (20%): £12,571 – £50,270
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Higher rate (40%): £50,271 – £125,140
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Additional rate (45%): above £125,140
These are marginal rates — only the portion of your income that falls within each band is taxed at that rate. If you earn £55,000, you do not pay 40% on all £55,000. You pay 0% on the first £12,570, 20% on the next £37,700 (£12,571–£50,270), and 40% only on the remaining £4,730.
Worked example — £55,000 salary (England)
Personal Allowance: £12,570 × 0% = £0
Basic rate band: £37,700 × 20% = £7,540
Higher rate: £4,730 × 40% = £1,892
Total income tax: £9,432
Scottish Income Tax
Scotland sets its own income tax rates through the Scottish Parliament. For 2025/26, Scottish taxpayers have five bands:
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Starter rate (19%): £12,571 – £15,397
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Basic rate (20%): £15,398 – £27,491
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Intermediate rate (21%): £27,492 – £43,662
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Higher rate (42%): £43,663 – £75,000
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Advanced rate (45%): £75,001 – £125,140
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Top rate (48%): above £125,140
National Insurance is a UK-wide tax — Scottish taxpayers pay the same NI as everyone else in the UK.
National Insurance Contributions
National Insurance (NI) is a separate tax on earnings. Contributions count towards your State Pension entitlement and certain benefits. For employees in 2025/26:
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0%: Earnings up to £12,570 (Primary Threshold)
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8%: Earnings between £12,570 and £50,270
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2%: Earnings above £50,270
Your employer also pays Class 1 NI on your earnings at 13.8% above £9,100 per year — this comes out of the employer's payroll cost, not your salary, so it does not reduce your take-home pay directly. However, it does make employing you more expensive, which is why salary sacrifice pension arrangements (where gross salary is reduced) save both you and your employer NI.
How Your Take-Home Pay Is Calculated
Your net (take-home) pay is arrived at by working through the following steps:
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Start with gross annual salary
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Deduct any salary sacrifice pension contributions (reduces taxable pay)
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Subtract your Personal Allowance to find taxable income
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Apply the income tax bands to taxable income
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Calculate National Insurance on gross earnings
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Deduct any student loan repayments if applicable
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Deduct relief-at-source pension contributions (if not salary sacrifice)
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The result is your net take-home pay
Worked example — £40,000 (England, no pension)
Gross salary: £40,000
Taxable income: £40,000 − £12,570 = £27,430
Income tax: £27,430 × 20% = £5,486
NI: (£40,000 − £12,570) × 8% = £2,194
Take-home: £40,000 − £5,486 − £2,194 = £32,320/yr (£2,693/mo)
Effective vs Marginal Tax Rate
These two rates mean very different things and are often confused.
Your marginal rate is the tax rate that applies to the next pound you earn. If your income is £45,000, you are a basic rate taxpayer with a 20% marginal income tax rate plus 8% NI — so your marginal rate on employment income is 28%.
Your effective rate is total tax paid divided by gross income. Because your first £12,570 is tax-free and lower income is taxed at lower rates, your effective rate is always lower than your marginal rate. On a £40,000 salary the effective income tax rate is about 13.7% (£5,486 ÷ £40,000).
The marginal rate matters most when deciding whether to take on extra work, increase a pension contribution, or use salary sacrifice — because that is the rate you save on additional income.
Frequently Asked Questions
What is the Personal Allowance for 2025/26?
The Personal Allowance is £12,570 for 2025/26. This is the amount you can earn before paying any income tax. It is reduced by £1 for every £2 you earn over £100,000, disappearing entirely at £125,140.
What are the UK income tax bands for 2025/26?
In England, Wales and Northern Ireland: 0% on income up to £12,570 (Personal Allowance), 20% basic rate on £12,571–£50,270, 40% higher rate on £50,271–£125,140, and 45% additional rate above £125,140. Scotland has different rates and bands.
How much National Insurance do I pay?
For employed workers in 2025/26: 0% on earnings up to £12,570, 8% on earnings between £12,570 and £50,270, and 2% on earnings above £50,270.
What is the difference between effective and marginal tax rate?
Your marginal tax rate is the rate you pay on the last pound you earn (e.g. 40% if you are a higher rate taxpayer). Your effective tax rate is your total tax paid divided by gross income — it is always lower because lower income bands are taxed at lower rates.
Is Scottish income tax different?
Yes. Scotland has five income tax bands. For 2025/26 these are: 19% starter rate (£12,571–£15,397), 20% basic rate (£15,398–£27,491), 21% intermediate rate (£27,492–£43,662), 42% higher rate (£43,663–£75,000), and 45% advanced rate (£75,001–£125,140), plus 48% top rate above £125,140. National Insurance is the same across the UK.
See your exact income tax, NI, and take-home pay — updated for 2025/26.
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