How UK Income Tax works

Income tax is the biggest single deduction most UK employees see on their payslip — but it’s also one of the most misunderstood. Once you know how the allowance and bands work, it’s simple. Here’s how UK income tax works in plain English for 2026/27.

The personal allowance

Everyone gets a personal allowance — the amount you can earn before paying any income tax. For 2026/27 it is £12,570. You do not pay income tax on the first £12,570 of your taxable income.

The allowance is reduced if your income is over £100,000: you lose £1 of allowance for every £2 over £100,000, so it disappears entirely once your income reaches £125,140. This is why people on £125,000+ often face an effective 60% rate on part of their income.

The rate bands

Income above your allowance is taxed in slices, called bands. For 2026/27 the bands are:

Band	Income above the allowance	Rate
Personal allowance	£0 – £12,570	0%
Basic rate	£12,571 – £50,270	20%
Higher rate	£50,271 – £125,140	40%
Additional rate	over £125,140	45%

These figures apply to income tax only — National Insurance is separate and uses different thresholds.

Worked example — £40,000 a year. Personal allowance £12,570 → taxable £27,430. All of it falls in the basic rate band: £27,430 × 20% = £5,486 income tax for the year (about £457 a month before National Insurance).

What counts as taxable income

Income tax applies to most money you receive: salary and wages, self-employed profits, pension income, rental income, benefits in kind, and interest on savings above your savings allowance. Some things are tax-free, including most Premium Bond winnings, the first £1,000 of savings interest for basic-rate taxpayers, and money from ISAs.

How PAYE collects it

If you’re an employee, income tax is collected automatically through PAYE — Pay As You Earn. Your employer works out your tax from your tax code and deducts it from your pay before you receive it, so by the end of the year your total tax is roughly correct. See our PAYE explained guide for the detail.

If you’re self-employed, you pay your tax yourself through the Self Assessment return instead.

Where income tax goes

Income tax is the government’s largest source of revenue and funds public services including the NHS, education, defence, welfare and infrastructure. National Insurance, despite being a separate charge, goes into the same pot and supports benefits and the state pension.

Using the numbers

Try the income tax calculator to see exactly how much income tax you pay at your income level, or the salary calculator for a full take-home pay breakdown including National Insurance, pension and student loan deductions.