Complete UK Tax Guide 2025/26: Income Tax, Allowances & Everything You Need to Know

Whether you're starting your first job, receiving a promotion, or just trying to understand why your payslip looks the way it does, understanding UK tax is essential. The good news is that once you grasp the fundamentals, the system becomes much clearer.

This guide covers everything you need to know about UK taxes for the 2025/26 tax year (6 April 2025 to 5 April 2026), from income tax rates and National Insurance to tax codes and allowances.

UK Income Tax Rates 2025/26

Income tax in England, Wales, and Northern Ireland works on a progressive system. You only pay the higher rates on income above each threshold, not on your entire salary.

Scottish Income Tax Rates 2025/26

Scotland has its own income tax rates set by the Scottish Parliament. These are generally more progressive with additional bands:

The Personal Allowance Explained

The personal allowance is the amount you can earn before paying any income tax. For 2025/26, this remains at £12,570.

However, there's an important catch that trips up many higher earners:

Personal Allowance Taper

If your 'adjusted net income' exceeds £100,000, your personal allowance reduces by £1 for every £2 you earn above this threshold. This means:

• At £100,000 income: Full £12,570 allowance
• At £112,570 income: £6,285 allowance
• At £125,140 income: £0 allowance

National Insurance Contributions 2025/26

National Insurance (NI) is often overlooked, but it's a significant part of your overall tax burden. Unlike income tax, NI funds specific benefits like the State Pension.

Employee National Insurance (Class 1)

Self-Employed National Insurance

If you're self-employed, you pay:

• Class 2 NI: Flat rate of £3.45 per week (if profits exceed £12,570)
• Class 4 NI: 6% on profits between £12,570 and £50,270, then 2% above

Understanding Your Tax Code

Your tax code appears on your payslip and tells your employer how much tax-free income you're entitled to. Here's how to decode it:

Common Tax Codes

The number in your tax code shows your allowance with the final digit removed. So 1257L means an allowance of £12,570.

Suffix Letters Explained

• L - Standard personal allowance
• M - Marriage Allowance transferred to you
• N - Marriage Allowance transferred from you
• T - HMRC reviewing your tax code
• W1 or M1 - Emergency tax code (non-cumulative)

Real-World Tax Calculation Example

Let's calculate the tax for someone earning £45,000 per year in England:

Tax-Efficient Strategies

1. Pension Contributions

Pension contributions reduce your taxable income. If you earn £55,000 and contribute £5,000 to your pension:

• Your taxable income becomes £50,000
• You avoid 40% tax on £4,730 (the amount that would have been in the higher rate band)
• That's £1,892 in tax savings, plus the contribution itself grows tax-free

For those caught in the 60% tax trap (earning £100,000-£125,140), pension contributions can effectively provide 60% tax relief.

2. Salary Sacrifice

With salary sacrifice schemes, you agree to a lower salary in exchange for benefits like additional pension contributions, cycle-to-work schemes, or childcare vouchers. Benefits include:

• Reduced income tax
• Reduced National Insurance (both employee and employer)
• Potential employer NI savings passed on to you

3. Marriage Allowance

If one partner earns below £12,570 and the other is a basic rate taxpayer, the lower earner can transfer £1,260 of their allowance. This saves the higher earner up to £252 per year.

4. ISA Allowances

The annual ISA allowance is £20,000. Income and gains within ISAs are tax-free. For those with savings generating taxable interest, maximising ISA usage should be a priority.

5. Capital Gains Tax Planning

The annual CGT allowance for 2025/26 is £3,000. Married couples can use both allowances (£6,000 total) by transferring assets between spouses before sale.

Self Assessment: Do You Need to File?

You must submit a Self Assessment tax return if you:

• Are self-employed with income over £1,000
• Earn over £100,000 (even if employed and paying tax through PAYE)
• Have untaxed income over £2,500 (rental income, dividends, savings interest)
• Are a company director (unless of a non-profit)
• Receive Child Benefit and you or your partner earns over £50,000
• Have foreign income
• Are claiming tax relief (on pension contributions over £40,000, gift aid, etc.)

Key Deadlines

Common Tax Mistakes to Avoid

1. Assuming PAYE Means Everything's Sorted

If you have multiple jobs, benefits in kind, or your circumstances change mid-year, you could end up with the wrong tax code. Always check your annual tax summary.

2. Forgetting Taxable Benefits

Company car, private medical insurance, and other benefits are taxable. The P11D form shows what you've received - check it matches your records.

3. Missing Out on Tax Relief

You can claim tax relief on:

• Professional subscriptions and fees
• Working from home expenses (if required by employer)
• Uniform cleaning and maintenance
• Tools and equipment for work

4. Not Claiming Marriage Allowance

If eligible, you can backdate claims for up to 4 years. That's potentially over £1,000 in refunds.

5. Exceeding the High Income Child Benefit Charge Threshold

If you or your partner earns over £50,000 and receive Child Benefit, you'll need to pay some or all of it back through your tax return. At £60,000+, you lose all of it.

Frequently Asked Questions

How do I check if I'm paying the right amount of tax?

Log into your Personal Tax Account at gov.uk. You can view your tax code, estimated annual tax, and report any discrepancies. You can also use our Tax Calculator to estimate what you should be paying.

What happens if I've overpaid tax?

HMRC usually refunds overpayments automatically after the tax year ends. If you think you've overpaid during the year, contact HMRC or submit a P50 form. You can claim refunds for up to 4 previous tax years.

Do I pay tax on redundancy payments?

The first £30,000 of redundancy pay is tax-free. Amounts above this are taxed as regular income. Notice pay and holiday pay are always taxable.

Are bonuses taxed differently?

No, bonuses are taxed as normal income. However, because they're often paid in a single month, that month's tax deduction may seem higher as it pushes you into higher tax bands temporarily. Over the year, you'll pay the correct total amount.

How does tax work if I have two jobs?

Your personal allowance is usually allocated to your main job. Your second job will likely be taxed at BR (20% on everything) or D0 (40%) depending on your combined income. Make sure HMRC knows about both jobs to avoid under or overpaying.

Final Thoughts

UK tax may seem complex, but understanding the fundamentals can save you significant money. The key points to remember:

• Tax is progressive - you only pay higher rates on income above each threshold
• Your personal allowance (£12,570) is tax-free unless you earn over £100,000
• National Insurance is separate from income tax and has different thresholds
• Check your tax code regularly - errors happen
• Use tax-efficient options like pensions, ISAs, and salary sacrifice where possible

For personalised calculations, use our free Salary Calculator or Tax Calculator to see exactly what you'll take home.