Income Tax is the UK's largest single source of government revenue. For employees, it is collected automatically through the Pay As You Earn (PAYE) system. For self-employed people and those with complex tax affairs, it is reported and paid through Self Assessment. Understanding how the rates, bands, and allowances interact is the starting point for any tax planning.
What is Income Tax?
Income Tax is a tax charged on most forms of income received by individuals. It is separate from National Insurance Contributions, which are charged on employment and self-employment income. Your total Income Tax is calculated by first deducting your Personal Allowance, then applying the relevant rate bands to your remaining income in a specific order: earned income first, then savings income, then dividends.
Income Tax rates and bands 2026/27 (England, Wales and Northern Ireland)
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
All thresholds are frozen at their current levels until 2030/31. Because wages typically rise with inflation each year while the thresholds stay fixed, more taxpayers move into higher bands over time — a phenomenon known as fiscal drag.
The higher rate threshold of £50,270 represents the point at which you enter the 40% band. In 2010 it was £43,875. The freeze effectively means more people pay 40% each year than would have under previous policy.
Scottish Income Tax 2026/27
Scotland operates its own Income Tax rates through the Scottish Parliament's devolved powers. Scottish taxpayers (anyone whose main home is in Scotland) pay different rates on non-savings, non-dividend income:
| Band | Rate | Taxable income |
|---|---|---|
| Personal Allowance | 0% | Up to £12,570 |
| Starter rate | 19% | £12,571 to £14,876 |
| Basic rate | 20% | £14,877 to £26,561 |
| Intermediate rate | 21% | £26,562 to £43,662 |
| Higher rate | 42% | £43,663 to £75,000 |
| Advanced rate | 45% | £75,001 to £125,140 |
| Top rate | 48% | Over £125,140 |
Scottish taxpayers pay significantly more income tax than their counterparts in England, Wales, and Northern Ireland on the same income. This is particularly noticeable for higher earners: a Scottish taxpayer on £60,000 pays over £1,500 more per year than an equivalent English taxpayer. Savings and dividend income is taxed at the same UK-wide rates regardless of residence.
The Personal Allowance
The Personal Allowance is the amount of income you can earn each year without paying any Income Tax. For 2026/27, it is £12,570, frozen at this level since April 2021 and due to remain frozen until at least April 2030/31.
The allowance begins to taper once your adjusted net income exceeds £100,000 — you lose £1 of allowance for every £2 earned above this threshold. At £125,140, your allowance is reduced to zero. This creates the 60% marginal rate trap (see below).
Some people qualify for additional allowances, including the Marriage Allowance (transfer up to £1,260 to a basic-rate taxpaying spouse, saving up to £252 per year) and the Blind Person's Allowance (£3,070 extra in 2026/27).
Read the full guide: How the Personal Allowance works
Types of income and how they are taxed
Different income types are treated differently, and the order in which HMRC stacks them against the allowances matters.
Employment income
Salary, wages, bonuses, and commission are employment income. They are taxed through PAYE and subject to National Insurance Contributions. Your employer deducts tax before paying you, using your tax code.
Self-employment income
Profits from sole trader or partnership businesses are taxable as trading income. You report these through Self Assessment and pay tax and NI via the January/July payment schedule.
Savings income
Interest from bank accounts, bonds, and most savings is savings income. After the Personal Allowance, a savings starter rate of 0% applies to the first £5,000 of savings income if your non-savings income (including earnings) falls within this band. Most basic-rate taxpayers also benefit from the Personal Savings Allowance: £1,000 tax-free for basic-rate taxpayers, £500 for higher-rate taxpayers, and nothing for additional-rate taxpayers.
Dividend income
Dividends from shares and company profit distributions are taxed at lower rates than employment income. After the £500 Dividend Allowance, dividends are taxed at 8.75% (basic), 33.75% (higher), or 39.35% (additional rate). Dividend income sits at the top of the income stack — after non-savings and savings income — which determines which rate band applies.
Rental income
Rental income from UK property is taxable as property income. You deduct allowable expenses (lettings agent fees, maintenance and repairs, insurance, mortgage interest at basic rate only) and pay tax on the net profit at your marginal Income Tax rate.
Understanding your tax code
Your tax code tells your employer how much tax-free income to give you each year. The most common code for 2026/27 is 1257L, which means your employer treats the first £12,570 as tax-free before applying income tax to the rest.
Common suffixes and their meanings:
- L — Standard Personal Allowance
- M — You have received the Marriage Allowance from your partner
- N — You have transferred part of your allowance to your partner
- T — HMRC needs to review your tax code (for example, if you have income over £100,000)
- K — Your untaxed income exceeds your allowances (negative allowance situation)
- 0T — All income is taxed with no Personal Allowance (used for emergency situations or when your allowance has been exhausted)
If your tax code looks wrong, check it through your Personal Tax Account on GOV.UK. An incorrect code can result in underpaying tax throughout the year, leading to a surprise bill.
The 60% marginal rate trap
The most significant tax trap in the UK Income Tax system affects anyone earning between £100,000 and £125,140. In this range, you pay 40% income tax on your earnings and lose £1 of Personal Allowance for every £2 earned. The combined effect is an effective marginal rate of 60% on income in this band — higher than the 45% additional rate that kicks in above £125,140.
The most common strategy to escape this trap is pension contributions. Contributions to a pension reduce your adjusted net income, potentially bringing it below £100,000 and restoring all or part of your Personal Allowance. A taxpayer earning £120,000 who contributes £20,000 to a pension can reclaim their full Personal Allowance and save over £6,000 in tax on the contribution.
How to reduce your Income Tax bill
Legal tax reduction strategies include:
- Pension contributions. The most powerful tool for most people. Contributions attract full income tax relief up to the Annual Allowance (£60,000 or 100% of earnings, whichever is lower) and can restore your Personal Allowance if you earn between £100,000 and £125,140.
- ISA contributions. Up to £20,000 per year into a Stocks and Shares ISA or Cash ISA grows and pays income tax-free. Investment returns and withdrawals are completely exempt from Income Tax and CGT.
- Salary sacrifice. Exchanging part of your salary for employer benefits (such as pension contributions, childcare vouchers, or an electric company car) can reduce both Income Tax and National Insurance.
- Gift Aid donations. Charitable donations under Gift Aid are treated as if made from gross income. Higher and additional-rate taxpayers can claim the difference between their marginal rate and the basic rate via Self Assessment.
- Enterprise Investment Scheme (EIS) and SEIS. Qualifying investments give 30% (EIS) or 50% (SEIS) Income Tax relief on the amount invested, plus CGT deferral and exemption benefits.
- Split income with a spouse. If assets are held jointly and income is split between spouses, income can be allocated to the lower-earning partner who pays a lower marginal rate.
Key takeaways
- Income Tax rates for 2026/27 are 20% (basic), 40% (higher), and 45% (additional) in England, Wales, and Northern Ireland. Scotland has six bands, with a top rate of 48%.
- The Personal Allowance is £12,570 and frozen until 2030/31, meaning more taxpayers enter higher bands each year as wages rise (fiscal drag).
- Income over £100,000 reduces the Personal Allowance at £1 for every £2 earned, creating an effective 60% marginal rate between £100,000 and £125,140.
- Different income types (earnings, savings, dividends) are taxed at different rates and stacked in a specific order against allowances.
- Pension contributions are the most effective legal way to reduce income tax, particularly for those earning near £100,000.
Frequently asked questions
What is the income tax threshold for 2026/27?
The income tax-free threshold is £12,570 — this is the Personal Allowance. You pay no income tax on the first £12,570 of income. Income between £12,571 and £50,270 is taxed at 20% (basic rate). Income above £50,270 is taxed at 40% (higher rate) up to £125,140, above which the 45% additional rate applies. These thresholds are frozen until 2030/31.
How do I find out how much income tax I have paid?
If you are employed, your P60 (issued by your employer by 31 May each year) shows total income and income tax paid in the tax year. You can also view an estimate through your HMRC Personal Tax Account at gov.uk. If you file Self Assessment, your tax calculation (SA302) shows your total income tax liability for each year.
Do I pay income tax on pension income?
Yes. State Pension and private pension withdrawals (above the 25% tax-free lump sum from defined contribution pensions) are taxable income. They are added to your other income and taxed at your marginal rate. However, if your total income (including pension) remains below the Personal Allowance of £12,570, no income tax is due.
What is the difference between income tax and National Insurance?
Income Tax and National Insurance are separate taxes, though both are deducted through PAYE for employees. Income Tax funds general government expenditure. National Insurance contributions build entitlement to specific state benefits, including the State Pension, Jobseeker's Allowance, and Maternity Allowance. You stop paying National Insurance at State Pension age, but Income Tax continues throughout life on taxable income above the Personal Allowance.
Can my employer pay me tax-free income?
Some employer payments are genuinely tax-free. These include up to £6 per week working-from-home allowance, business mileage at HMRC approved rates (up to 45p per mile for the first 10,000 miles), employer pension contributions (up to the Annual Allowance), employer-provided childcare vouchers (legacy scheme), cycle-to-work scheme payments, and certain welfare-related payments. Payments disguised as tax-free that do not meet the specific qualifying rules will be treated as taxable income.