Income Tax Guide UK: Bands, Rates & Personal Allowance

The Complete UK Income Tax Guide for 2025/26

Understanding how income tax works in the UK is essential whether you are employed, self-employed, or retired. This guide covers every band, allowance, and relief available in the 2025/26 tax year (6 April 2025 to 5 April 2026).

Income Tax Bands and Rates — England, Wales & Northern Ireland

| Band | Taxable Income | Rate | |---|---|---| | Personal Allowance | Up to £12,570 | 0% | | Basic Rate | £12,571 – £50,270 | 20% | | Higher Rate | £50,271 – £125,140 | 40% | | Additional Rate | Over £125,140 | 45% |

These bands apply to employment income, pension income, rental income, savings interest above your savings allowance, and dividend income above the dividend allowance (at different rates for dividends — see below).

Dividend Tax Rates (2025/26):

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%
• Dividend allowance: £500

Scottish Income Tax Rates — 2025/26

Scottish taxpayers have six bands:

| Band | Taxable Income | Rate | |---|---|---| | Personal Allowance | Up to £12,570 | 0% | | Starter Rate | £12,571 – £14,876 | 19% | | Basic Rate | £14,877 – £26,561 | 20% | | Intermediate Rate | £26,562 – £43,662 | 21% | | Higher Rate | £43,663 – £75,000 | 42% | | Advanced Rate | £75,001 – £125,140 | 45% | | Top Rate | Over £125,140 | 48% |

Scottish rates only apply to non-savings, non-dividend income. Savings and dividends are taxed at UK-wide rates.

Welsh Income Tax

Wales has the Welsh Rate of Income Tax (WRIT). The Welsh Government sets 10p of the basic, higher, and additional rates. Currently, all Welsh rates match England — meaning there is no practical difference for the 2025/26 tax year. Welsh taxpayers have a tax code prefixed with "C".

Personal Allowance and the £100,000 Trap

The standard Personal Allowance is £12,570. It is reduced by £1 for every £2 of income above £100,000. This means:

• At £100,000 income, full £12,570 allowance
• At £125,140 income, £0 allowance

This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. For every extra £1 you earn, you lose 50p of allowance (taxed at 40%) plus pay 40% on the pound itself — netting out at 60p in tax.

Planning tip: Pension contributions can bring your adjusted net income below £100,000, restoring the full Personal Allowance. A £1,000 pension contribution in this band effectively saves £600 in tax.

Marriage Allowance

If one partner earns less than £12,570 and the other is a basic rate taxpayer, the lower earner can transfer up to £1,260 of their Personal Allowance. This saves the recipient up to £252 per year. You can also backdate claims by up to 4 tax years.

Blind Person's Allowance

An additional £3,070 (2025/26) tax-free allowance is available if you are registered blind or severely sight-impaired. This can be transferred to a spouse if unused.

How PAYE Works

Pay As You Earn is the system by which employers deduct income tax and National Insurance from your wages before paying you.

Tax Codes Explained:

• 1257L — The most common code. Means you have a £12,570 Personal Allowance with no adjustments.
• BR — All income taxed at basic rate (20%). Used for second jobs.
• D0 — All income taxed at 40%. Used for second jobs where income is expected to fall in the higher rate band.
• K codes — You owe tax that cannot be collected through the allowance (e.g., benefits in kind). The number after K is added to your taxable income.
• NT — No tax deducted (rare; used for specific exempt categories).
• 0T — No Personal Allowance. Applied if HMRC has insufficient information or your allowance is fully used.
• S prefix — Scottish taxpayer (e.g., S1257L)
• C prefix — Welsh taxpayer (e.g., C1257L)

If your tax code is wrong, contact HMRC immediately — incorrect codes mean you overpay or underpay throughout the year.

Self-Assessment

Who Must File?

• Self-employed individuals with income over £1,000
• Partners in a business partnership
• Anyone with income over £150,000 (from 2025/26, this threshold is being reviewed)
• People with untaxed income (rental income, investments, foreign income)
• Higher-rate or additional-rate taxpayers with savings or investment income
• Anyone HMRC sends a notice to

Key Deadlines (2025/26 tax year):

• 5 October 2026 — Register for self-assessment if filing for the first time
• 31 October 2026 — Paper return deadline
• 31 January 2027 — Online return deadline and payment of tax owed
• 31 July 2027 — Second payment on account due

Payments on Account: If your self-assessment bill is over £1,000 and less than 80% was collected at source, you make two advance payments — each equal to 50% of the previous year's bill. These are due 31 January and 31 July.

Tax-Free Income Sources

The following are not subject to income tax:

• ISA interest and growth
• First £1,000 of savings interest (basic rate taxpayer) or £500 (higher rate) — the Personal Savings Allowance
• First £500 of dividend income — the Dividend Allowance
• First £1,000 of trading or property income — Trading and Property Allowances
• Premium Bond prizes
• Certain state benefits (Universal Credit, Housing Benefit, Child Benefit — though CB is clawed back via the High Income Child Benefit Charge above £60,000)
• Redundancy payments up to £30,000
• Rent-a-Room relief (up to £7,500 for letting a furnished room in your home)

Pension Tax Relief

Pension contributions receive tax relief at your marginal rate:

• Basic rate (20%) — Automatically added to your pension. A £80 net contribution becomes £100 in your pension.
• Higher rate (40%) — Claim the extra 20% through self-assessment or by adjusting your tax code.
• Additional rate (45%) — Claim the extra 25% through self-assessment.
• Scottish taxpayers — Relief matches Scottish rates (19%–48%).

Annual allowance: £60,000 (or 100% of earnings if less). Unused allowance can be carried forward for up to 3 years.

Gift Aid

When you donate to charity via Gift Aid, the charity claims 25p for every £1 you give. Higher and additional rate taxpayers can claim the difference between their marginal rate and 20% through self-assessment. Donating £100 (grossed up to £125) saves a 40% taxpayer £25.

Employment Expenses

You can claim tax relief on expenses incurred wholly, exclusively, and necessarily in performing your job duties:

• Professional subscriptions (if on the HMRC approved list)
• Uniform washing allowance (flat rate: £60 for most jobs)
• Working from home allowance (£6 per week without receipts, or actual costs with evidence)
• Tools and equipment required for work
• Business mileage in your own vehicle (45p per mile for the first 10,000 miles, 25p thereafter)

Common Tax Mistakes

1. Not claiming marriage allowance — Millions of eligible couples miss this.
2. Ignoring the £100k trap — Not making pension contributions to recover the Personal Allowance.
3. Overpaying through wrong tax codes — Check your code on every payslip.
4. Missing self-assessment deadlines — Late filing penalties start at £100 and escalate.
5. Forgetting to claim higher-rate pension relief — The basic rate is automatic; the rest is not.
6. Not using your ISA allowance — Tax-free growth is the simplest tax planning available.
7. Failing to report rental income — HMRC cross-references Land Registry data.

Use our Income Tax Calculator to work out your exact liability for 2025/26.

National Insurance Contributions Overview

While not technically income tax, National Insurance (NI) is deducted alongside income tax and affects your take-home pay significantly:

Class 1 (employees) 2025/26:

• 8% on earnings between £12,570 and £50,270
• 2% on earnings above £50,270
• Employer NI: 15% on earnings above £5,000

Class 4 (self-employed):

• 6% on profits between £12,570 and £50,270
• 2% on profits above £50,270

NI is calculated differently from income tax — it is based on weekly or monthly earnings rather than annual income, which means it does not benefit from the same smoothing.

Tax-Efficient Salary and Dividend Strategies

Company directors can choose how to extract profits. The most tax-efficient structure for 2025/26 is typically:

Salary up to the NI threshold (£12,570) — Preserves the Personal Allowance and NI qualifying years without incurring any tax or NI.

Dividends for additional income — Dividends do not attract NI. After the £500 dividend allowance, basic rate tax on dividends is 8.75% — significantly lower than the combined income tax and NI on salary (32% in England). However, Corporation Tax must be paid first.

Understanding Tax Codes in Detail

Your tax code is calculated by HMRC based on information from your employer, pension provider, and any claims. Common situations causing incorrect codes include starting a new job without a P45, having benefits in kind with incorrect values, not claiming allowable expenses, and HMRC estimates of untaxed income being wrong.

Emergency tax codes (ending in M1 or W1) are applied when HMRC lacks information. These calculate tax non-cumulatively, potentially causing overpayment. The code should be corrected within a few months.

Advanced Pension Tax Planning

Beyond basic tax relief, pension contributions offer advanced planning opportunities:

Recovering Child Benefit — If your income is between £60,000 and £80,000, you lose Child Benefit through the High Income Child Benefit Charge (HICBC). A pension contribution reducing adjusted net income below £60,000 recovers the full benefit.

Employer contributions via salary sacrifice are not subject to employee income tax or NI. This saves both employee and employer NI, making it more efficient than personal contributions.

Property Income and Tax

Rental income is subject to income tax at your marginal rate. Key allowances include the property income allowance (first £1,000 tax-free instead of deducting expenses), allowable expenses such as mortgage interest (restricted to basic rate tax credit since 2020), repairs, insurance, agent fees, and accountancy. Rent-a-Room relief provides £7,500 tax-free for letting a furnished room in your own home.

Losses from rental property can be carried forward against future rental profits but not against other income.