UK Income Tax Bands & Rates 2025/26
Complete guide to understanding UK income tax, personal allowance, and legal ways to reduce your tax bill
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Table of Contents
1. How UK Income Tax Works
Understanding UK income tax is essential for managing your finances effectively. The UK uses a progressive tax system, meaning you pay different rates on different portions of your income.
Key Principles
- Tax-free allowance: You don't pay tax on the first £12,570 you earn (Personal Allowance)
- Progressive rates: Higher earnings are taxed at higher rates
- PAYE system: Most employees have tax deducted automatically from wages
- Tax year: Runs from 6 April to 5 April the following year
- Self Assessment: Self-employed and some others file annual returns
What Counts as Taxable Income?
- Employment income (salary, wages, bonuses)
- Self-employment profits
- Pension income (state and private)
- Rental income from property
- Investment income (dividends, savings interest above allowances)
- Some state benefits
2. Tax Bands & Rates 2025/26
Here are the current income tax bands for England, Wales, and Northern Ireland for the 2025/26 tax year:
Complete Tax Bands Table
| Band | Taxable Income | Rate | Tax Due |
|---|---|---|---|
| Personal Allowance | First £12,570 | 0% | £0 |
| Basic Rate | £12,571 - £50,270 | 20% | Up to £7,540 |
| Higher Rate | £50,271 - £125,140 | 40% | Up to £29,948 |
| Additional Rate | Over £125,140 | 45% | No upper limit |
3. Personal Allowance Explained
The Personal Allowance is the amount you can earn before paying any income tax. For 2025/26, this is £12,570.
When Your Personal Allowance Changes
| Situation | Personal Allowance | Notes |
|---|---|---|
| Standard | £12,570 | Most people |
| Income over £100,000 | Reduced by £1 for every £2 over £100k | Zero at £125,140 |
| Marriage Allowance transferred | £11,310 (if transferring) | Or £13,830 (if receiving) |
| Blind Person's Allowance | £12,570 + £3,070 | Additional allowance |
The £100,000 Tax Trap
If you earn between £100,000 and £125,140, you face an effective 60% marginal tax rate. Here's why:
- You pay 40% income tax on earnings over £50,270
- Your Personal Allowance reduces by £1 for every £2 earned over £100,000
- This lost allowance is effectively taxed at 40%
- Combined effect: 40% + (40% x 0.5) = 60% marginal rate
Example: The £100k Trap
If you earn £110,000:
- £10,000 over the £100,000 threshold
- Personal Allowance reduced by £5,000 (£10,000 ÷ 2)
- Extra tax: £5,000 × 40% = £2,000
- Plus 40% on the £10,000 itself = £4,000
- Total extra tax on £10,000 = £6,000 (60% rate)
4. National Insurance Contributions
National Insurance (NI) is separate from income tax but is also deducted from your earnings. It funds state benefits including the State Pension and NHS.
Employee NI Rates 2025/26
| Earnings | Rate | Notes |
|---|---|---|
| Below £12,570/year | 0% | No NI due |
| £12,570 - £50,270/year | 8% | Main rate (Class 1) |
| Above £50,270/year | 2% | Upper rate |
Self-Employed NI Rates 2025/26
| Class | Profits | Rate |
|---|---|---|
| Class 2 | Over £12,570 | Abolished from April 2024 |
| Class 4 | £12,570 - £50,270 | 6% |
| Class 4 | Over £50,270 | 2% |
Employer NI Contributions
Employers pay NI on top of your salary - this doesn't come out of your wages but is an additional cost to your employer:
- Rate: 15% on earnings above £5,000/year (Secondary Threshold)
- Employment Allowance: Businesses can claim up to £5,000 reduction
5. Dividend Tax Rates
If you receive dividends from shares or as a company director, they're taxed differently from salary income.
Dividend Allowance 2025/26
You can receive £500 in dividends tax-free each year. This was reduced from £1,000 in 2023/24 and £2,000 in 2022/23.
Dividend Tax Rates
| Tax Band | Dividend Rate | Comparison to Salary |
|---|---|---|
| Basic Rate (up to £50,270) | 8.75% | vs 20% income tax |
| Higher Rate (£50,271-£125,140) | 33.75% | vs 40% income tax |
| Additional Rate (over £125,140) | 39.35% | vs 45% income tax |
Example: Company Director Tax Efficiency
A director pays themselves £12,570 salary (using up Personal Allowance) plus £40,000 dividends:
- Salary: £12,570 (0% tax, 0% NI)
- First £500 dividends: 0% (dividend allowance)
- Remaining £39,500 dividends: 8.75% = £3,456.25
- Total tax on £52,570: £3,456.25
- Compare to same as salary: approximately £8,650
6. Scottish Income Tax
If you live in Scotland, you pay Scottish Income Tax rates set by the Scottish Parliament. These differ from the rest of the UK.
Scottish Tax Bands 2025/26
| Band | Taxable Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter Rate | £12,571 - £15,397 | 19% |
| Basic Rate | £15,398 - £27,491 | 20% |
| Intermediate Rate | £27,492 - £43,662 | 21% |
| Higher Rate | £43,663 - £75,000 | 42% |
| Advanced Rate | £75,001 - £125,140 | 45% |
| Top Rate | Over £125,140 | 48% |
Scotland vs Rest of UK Comparison
| Salary | Scotland Tax | rUK Tax | Difference |
|---|---|---|---|
| £30,000 | £3,703 | £3,486 | +£217 |
| £40,000 | £5,863 | £5,486 | +£377 |
| £50,000 | £8,545 | £7,486 | +£1,059 |
| £75,000 | £19,157 | £17,432 | +£1,725 |
| £100,000 | £30,407 | £27,432 | +£2,975 |
7. Real-World Tax Examples
Example 1: Average UK Salary (£35,000)
Annual Breakdown:
- Personal Allowance: £12,570 (0% tax) = £0
- Basic Rate: £22,430 (20%) = £4,486
- Total Income Tax: £4,486
- National Insurance: £1,794 (8% on £22,430)
- Total Deductions: £6,280
- Take-Home Pay: £28,720 (£2,393/month)
Example 2: Higher Rate Taxpayer (£60,000)
Annual Breakdown:
- Personal Allowance: £12,570 (0%) = £0
- Basic Rate: £37,700 (20%) = £7,540
- Higher Rate: £9,730 (40%) = £3,892
- Total Income Tax: £11,432
- NI: £3,016 (8% on £37,700) + £195 (2% on £9,730) = £3,211
- Total Deductions: £14,643
- Take-Home Pay: £45,357 (£3,780/month)
Example 3: Additional Rate Taxpayer (£150,000)
Annual Breakdown:
- Personal Allowance: £0 (lost due to income over £125,140)
- Basic Rate: £37,700 (20%) = £7,540
- Higher Rate: £87,440 (40%) = £34,976
- Additional Rate: £24,860 (45%) = £11,187
- Total Income Tax: £53,703
- NI: £3,016 + £1,995 = £5,011
- Total Deductions: £58,714
- Take-Home Pay: £91,286 (£7,607/month)
8. Legal Ways to Reduce Your Tax
There are many legitimate strategies to minimise your tax bill. Tax avoidance (legal) is different from tax evasion (illegal).
For Everyone
- Maximise pension contributions: Get tax relief at your marginal rate (20%, 40%, or 45%)
- Use ISA allowances: £20,000/year grows completely tax-free
- Marriage Allowance: Transfer £1,260 to spouse, save up to £252
- Claim allowable expenses: Work from home, professional subscriptions, uniforms
- Use Venture Capital Schemes: EIS, SEIS, VCT offer significant tax reliefs
For Higher Earners (£50k+)
- Salary sacrifice: Exchange salary for pension contributions, save NI too
- Charitable giving: Gift Aid donations reduce taxable income
- Carry back pension contributions: Use previous years' allowances
- Time income carefully: Defer bonuses if approaching higher band
For the £100k-£125k Trap
- Pension contributions: Reduce adjusted net income below £100k
- Charitable donations: Same effect, supports good causes
- Salary sacrifice for benefits: Electric cars, additional pension
Higher rate taxpayer puts £10,000 in pension:
- Pension provider claims basic rate: £2,500 (total in pot: £12,500)
- Claim additional relief via Self Assessment: £2,500
- Net cost to you: £5,000 for £12,500 pension pot
- Effective return: 150% before any investment growth!
For Self-Employed
- Claim all allowable expenses: Home office, equipment, travel, training
- Use flat rate scheme if eligible: Simplified expenses
- Consider incorporation: May be tax-efficient at higher profit levels
- Pay spouse if they work in business: Use their allowances
- Time purchases strategically: Equipment before year-end
Useful Tax Calculators
Use our free calculators to work out your exact tax position:
- Salary Calculator - Calculate your take-home pay
- Income Tax Calculator - Work out your tax bill
- National Insurance Calculator - Calculate NI contributions
- Pension Calculator - Plan your retirement
- Dividend Tax Calculator - For company directors
James Mitchell, ACCA
Chartered Accountant & Former HMRC Advisor
James is a Chartered Certified Accountant (ACCA) specialising in UK personal taxation and financial planning. With over 12 years in practice and a background as a former HMRC compliance officer, he brings authoritative insight to complex tax topics.