Income tax in the UK uses a progressive system — you pay different rates on different portions of your earnings, not a single flat rate on everything. Sounds straightforward enough, yet it trips up a surprising number of people. Let's walk through exactly how it works for the 2025/26 tax year.
The personal allowance
Everyone gets a tax-free personal allowance of £12,570. This means you don't pay any income tax on the first £12,570 you earn. The allowance has been frozen at this level since 2021, and the government has confirmed it'll stay put until at least April 2028. With wages rising over that period, more people are being dragged into higher tax bands — a phenomenon known as fiscal drag.
One catch: if you earn over £100,000, your personal allowance starts shrinking. You lose £1 of allowance for every £2 earned above £100,000, which means it disappears entirely at £125,140. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140, which feels punitive if you're not expecting it.
Tax bands for 2025/26
After your personal allowance, your income is taxed in slices:
- Basic rate (20%) — £12,571 to £50,270
- Higher rate (40%) — £50,271 to £125,140
- Additional rate (45%) — over £125,140
Scottish taxpayers have a different set of bands with six rates ranging from 19% to 48%. If you live in Scotland, check the Scottish Government's website or your tax code — it'll start with an 'S'.
How your tax is calculated
Imagine you earn £55,000 a year. Here's the maths:
- First £12,570 — tax-free (personal allowance)
- Next £37,700 (£12,571 to £50,270) — taxed at 20% = £7,540
- Remaining £4,730 (£50,271 to £55,000) — taxed at 40% = £1,892
Total income tax: £9,432. Your effective tax rate is about 17.1%, even though you're a higher-rate taxpayer. That distinction matters — being "in the 40% bracket" doesn't mean 40% of your entire salary goes to HMRC.
National Insurance on top
Income tax isn't the only deduction from your pay. You also pay National Insurance contributions (NICs) — 8% on earnings between £12,570 and £50,270, then 2% above that. Add income tax and NICs together, and a higher-rate taxpayer faces a combined marginal rate of 42% on earnings above £50,270.
Tax codes and what they mean
Your tax code tells your employer how much tax-free income you're entitled to. The most common code is 1257L, which corresponds to the standard £12,570 personal allowance. If your code looks different — say BR, D0, or includes a K prefix — something unusual is going on. HMRC's website explains each code, or you can ring their helpline on 0300 200 3300.
It's worth checking your tax code every year, especially if you've changed jobs, started receiving a pension, or have employment benefits like a company car. Wrong tax codes are surprisingly common and can mean you're overpaying or underpaying for months before anyone notices.
Marriage allowance
If you're married or in a civil partnership and one partner earns less than the personal allowance, they can transfer up to £1,260 of their unused allowance to the other partner. This saves the higher earner up to £252 a year. It's not life-changing money, but it's free — and you can backdate claims for four years.
Checking if you've overpaid
HMRC runs an annual reconciliation called P800. If they find you've paid too much tax, they'll write to you (or send a notification through your Personal Tax Account) offering a refund. You can also check this yourself by logging into your HMRC account at gov.uk. Don't ignore these letters — refunds don't always happen automatically.