UK income tax explained: bands, allowances and your tax code

The personal allowance is your tax-free slice

Everyone in the UK gets a personal allowance, the amount you can earn before income tax starts. For 2025/26 it sits at £12,570 a year, unchanged from recent years as the government has frozen it rather than raising it with inflation.

That freeze matters more than it sounds. As wages rise but the allowance stays still, a bigger share of your pay becomes taxable each year, a process often called fiscal drag. You don't need to apply for the allowance; it's built into your tax code automatically.

If you earn over £100,000, the allowance starts shrinking, losing £1 for every £2 you earn above that threshold, until it disappears entirely at £125,140. This creates an unusually high effective tax rate in that band, which surprises a lot of people the first time they hit it.

How the bands stack on top of each other

Once you're past the personal allowance, income tax in England, Wales and Northern Ireland is charged in bands: 20% basic rate up to £50,270, 40% higher rate up to £125,140, and 45% additional rate above that. Scotland uses its own bands and rates, which are more numerous and slightly different.

The important thing to understand is that these rates are marginal, not flat. Moving into the 40% band doesn't mean all your income is taxed at 40%; only the slice above £50,270 is. People sometimes turn down a pay rise thinking it'll cost them money overall, which almost never happens under this system.

A tool like our income tax calculator can show you exactly how much of your salary falls into each band, which is often clearer than working through the arithmetic by hand, especially once National Insurance is added on top.

Reading your tax code

Your tax code is a short string like 1257L that tells your employer how much tax-free income to give you before deductions start. The number is usually your personal allowance divided by ten, so 1257L reflects the standard £12,570 allowance.

The letter tells HMRC and your payroll system something extra: L means you get the standard allowance, K means you owe tax on income that hasn't been taxed elsewhere and it reduces your allowance, and BR means all your income from that job is taxed at basic rate with no allowance at all, common for second jobs.

It's worth checking your tax code at least once a year, especially after a job change, because emergency or incorrect codes are common and can mean you're paying too much or too little without realising it until much later.

Why emergency tax codes happen

When you start a new job without giving your employer a P45 from your previous role, they often can't confirm your tax history straight away, so they apply an emergency code that assumes this is your only income and taxes you accordingly, sometimes on a non-cumulative basis.

This can mean you overpay tax for a month or two until HMRC updates the record with your correct year-to-date figures. The good news is that any overpayment is usually refunded automatically through your pay once the correct code is applied, without you needing to do anything.

If it drags on for more than a couple of pay periods, it's worth contacting HMRC directly, since payroll departments can only apply the code they've been given and can't fix the underlying record themselves.

Taxable income beyond your salary

Income tax doesn't just apply to your salary. Bonuses, commission, most benefits in kind such as a company car, and rental income all count towards your taxable total, even though they're calculated differently on your payslip or self-assessment return.

Savings interest and dividends have their own separate allowances and rates that sit alongside the main income tax system rather than inside it. If you have income from several sources, it's the combined total that determines which band your top slice of income falls into.

This is where things get genuinely complicated for people with side income or investments, and it's usually worth using a calculator or getting proper advice rather than guessing, since underpaying tax through self-assessment can lead to penalties later on.

Pension contributions and reducing your taxable income

Contributing to a workplace pension through salary sacrifice or relief-at-source arrangements reduces the income that's counted for tax purposes, which is one of the few genuinely effective ways to lower your tax bill while still keeping the money, just locked away until retirement.

For higher earners, pension contributions are also the main lever for pulling adjusted net income back under £100,000 and avoiding the loss of the personal allowance, which can make the effective saving from each pound contributed much larger than the headline tax rate suggests.

Employers vary in how they structure this, so it's worth asking your payroll or HR team exactly how your scheme affects your taxable pay, since salary sacrifice and personal contributions are treated slightly differently for tax purposes.

Self-employed income tax works differently

If you're self-employed, there's no payroll doing the calculation for you each month. Instead, you report your income and allowable expenses through self-assessment, and the same personal allowance and band structure applies to your profit rather than your gross income.

The complication is timing: self-assessment tax is usually paid in a lump sum by 31 January, often alongside a payment on account towards the following year, which catches a lot of first-time freelancers off guard when the bill is larger than expected.

Our self-employed tax calculator is built specifically for this, estimating income tax and National Insurance together based on your expected profit, so you can set aside the right amount as you go rather than facing a surprise in January.

Common mistakes that cost people money

The most frequent mistake is not checking your tax code after a life change, whether that's a new job, a second income, or losing a benefit in kind, all of which can leave an outdated code in place for months.

Another common one is misunderstanding the £100,000 taper and being caught out by the effective 60% rate in that band, without realising that pension contributions or charitable giving can bring taxable income back down and remove the taper entirely.

Finally, people sometimes assume a pay rise into a higher band is a net loss overall, when in reality only the portion above the threshold is taxed at the higher rate, so it's always worth running the actual numbers rather than assuming the worst.

Common questions

How much can I earn before I pay income tax?

In 2025/26 the standard personal allowance is £12,570, meaning you can earn up to that amount tax-free in most cases. This is an estimate based on standard circumstances; your allowance may differ if you have other income, owe tax from a previous year, or earn over £100,000, where the allowance is gradually withdrawn.

Why did my tax code change without me doing anything?

HMRC updates tax codes when it receives new information, such as a change in benefits, a new job, or a correction to a previous estimate. It's not always an error, but it's worth checking the notice they send you to confirm the figures look right for your situation, and querying it if something seems off.

Is Scottish income tax different from the rest of the UK?

Yes. Scotland sets its own income tax bands and rates, which currently include more bands than the rest of the UK and slightly different thresholds. If you live in Scotland, your payslip will usually show an S prefix on your tax code to reflect this.

Do I pay tax on bonuses at a higher rate?

Bonuses are taxed as ordinary income, not at a special higher rate, but because they're often paid in one lump sum, PAYE can withhold tax as if you earned that amount every month, pushing more into higher bands temporarily. This usually evens out over the tax year through your normal pay.

Can I get a refund if I've overpaid tax?

Yes, overpaid tax is usually refunded automatically, either through your payslip in later months once your code is corrected, or directly from HMRC at the end of the tax year. If you think you've overpaid and nothing has happened after a few months, you can contact HMRC to check your record.

Tools for this

• Income Tax Calculator