How Income Tax actually works
UK Income Tax is progressive: you only pay the higher rate on the slice of income that falls within each band, not on your entire income. The first chunk of income most people earn is tax-free at all, thanks to the Personal Allowance.
Income Tax bands for 2026/27 (England, Wales & 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% |
Scotland sets its own Income Tax bands and rates, which currently range from 19% to 48% across more bands than the rest of the UK — if you're a Scottish taxpayer, the England/Wales/NI table above won't apply to you directly.
Two things worth knowing about the Personal Allowance: it shrinks by £1 for every £2 you earn over £100,000, disappearing entirely at £125,140 (which is why the additional rate threshold sits exactly there) — and it has been frozen in cash terms for several years running, which means more people are pulled into higher bands over time purely through pay rises, a process often called "fiscal drag."
Marriage Allowance
If you're married or in a civil partnership and one of you earns below the Personal Allowance while the other is a basic-rate taxpayer, the lower earner can transfer £1,260 of their unused Personal Allowance to their partner. That reduces the recipient's tax bill by up to £252 a year — a modest but genuinely free saving that a surprising number of eligible couples never claim.
How PAYE works
Most employees never file a tax return because Income Tax and National Insurance are deducted automatically from wages under Pay As You Earn (PAYE). Your employer uses a tax code — usually something like "1257L" for someone on the standard Personal Allowance — to work out how much tax-free pay you get before deductions start. If your tax code is wrong (a common cause of over- or under-paying tax), you can check and query it via your personal tax account on GOV.UK.
National Insurance alongside Income Tax
Most employees also pay Class 1 National Insurance on earnings above a weekly threshold, currently at 8% on earnings between roughly £242 and £967 a week, and 2% above that. NI is separate from Income Tax but is deducted the same way, through PAYE, and both show up on your payslip.
Savings and dividend allowances
On top of your Personal Allowance, most basic-rate taxpayers get a £1,000 tax-free Personal Savings Allowance on interest from ordinary (non-ISA) savings, reduced to £500 for higher-rate taxpayers and removed entirely for additional-rate taxpayers. There's also a £500 tax-free Dividend Allowance for anyone receiving dividend income outside an ISA, such as from shares held directly.
Key takeaways
- Only the income within each band is taxed at that band's rate — moving into a higher band doesn't tax all your income at the higher rate.
- The Personal Allowance tapers away completely between £100,000 and £125,140 of income.
- Marriage Allowance is free money for eligible couples worth up to £252 a year.
- Scotland has its own separate Income Tax bands and rates.