Tax Guide: UK Income Tax 2025/26 — Bands, Personal Allowance, PAYE and How to Pay Less

Income tax in England, Wales and Northern Ireland is charged at three main rates above the Personal Allowance of £12,570. The basic rate of 20% applies to taxable income up to £37,700 (meaning total earnings up to £50,270). The higher rate of 40% covers income from £50,271 to £125,140, and the additional rate of 45% applies to everything above £125,140.

These thresholds have been frozen since 2021/22 and are set to remain unchanged until at least April 2028. With wages rising due to inflation, this freeze — sometimes called a 'stealth tax' — continues to drag more people into higher bands. Someone earning £55,000 in 2025/26 pays the same rate as someone on £55,000 in 2021/22, even though their real spending power has fallen.

There is also a 0% starting rate for savings income of up to £5,000, but this is reduced by £1 for every £1 of non-savings income above the Personal Allowance. In practice, it mainly benefits those with very low earned income. The Personal Savings Allowance provides a separate £1,000 tax-free — see GOV.UK for current allowances (gov.uk/income-tax-rates) allowance on savings interest for basic-rate taxpayers (£500 for higher-rate, nil for additional-rate).

Every UK taxpayer receives a Personal Allowance of £12,570 — the amount you can earn before paying any income tax. However, once your adjusted net income exceeds £100,000, the allowance is reduced by £1 for every £2 of income above that threshold. By the time income reaches £125,140, the Personal Allowance has been fully withdrawn.

This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. For every additional £2 you earn in this band, you lose £1 of Personal Allowance (taxed at 40%) plus pay 40% on the extra £2 — resulting in £1.20 of tax on £2 of income. This is one of the most punishing marginal rates in the UK tax system and catches many professionals, senior managers and business owners off guard.

The most common strategies to mitigate this trap include making pension contributions to bring adjusted net income below £100,000, using salary sacrifice arrangements, or timing bonus payments. If you earn between £100,000 and £125,140, even a modest pension contribution can deliver relief at an effective 60% rate — far higher than the standard 40% higher-rate relief. For example, a £10,000 gross pension contribution for someone earning £110,000 would save £6,000 in income tax, not just £4,000.

Most employees and pensioners pay income tax through Pay As You Earn (PAYE). Your employer uses a tax code issued by HMRC to calculate how much tax to deduct from each pay packet. The standard tax code for 2025/26 is 1257L, which tells your employer to give you £12,570 of tax-free pay across the year before deducting tax at the basic rate.

Your tax code can be adjusted to account for benefits in kind (company car, private medical insurance), unpaid tax from previous years, the Marriage Allowance, or additional income HMRC knows about. A BR code means all income from that source is taxed at 20% (common for second jobs), while a D0 code taxes everything at 40%. An 'M' suffix means you receive Marriage Allowance, adding £1,257 to your tax-free amount.

Common PAYE problems include being placed on an emergency tax code when starting a new job (often 1257L M1 or W1, which ignores your year-to-date position) and having underpayments collected through a reduced tax code the following year. If you believe your tax code is wrong, check your Personal Tax Account on GOV.UK or call HMRC on 0300 200 3300. Overpayments can be reclaimed — HMRC estimates that around £1.2 billion in overpaid tax goes unclaimed each year.

If you live in Scotland, you pay Scottish income tax rates set by the Scottish Parliament. For 2025/26, Scotland has six bands compared to three in the rest of the UK. The starter rate of 19% applies to the first £2,827 of taxable income, followed by the basic rate of 20% up to £14,921, and the intermediate rate of 21% up to £31,092.

Above that, the differences become more significant. The higher rate is 42% (compared to 40% in England) on income from £31,093 to £62,430, the advanced rate is 45% from £62,431 to £125,140, and the top rate is 48% on income above £125,141. Scottish taxpayers earning above £28,850 pay more income tax than equivalent earners in England.

Scottish residents are identified by their tax code, which starts with 'S' (for example, S1257L). The Personal Allowance and National Insurance thresholds remain UK-wide — only income tax rates differ. Your residence for Scottish tax purposes is determined by where you live, not where you work.

Several reliefs and allowances can reduce the amount of income tax you pay. The most powerful is pension contributions — contributions to a personal pension or SIPP receive tax relief at your marginal rate. A basic-rate taxpayer contributing £800 sees it grossed up to £1,000 by the pension provider. Higher-rate taxpayers can claim an additional £200 through Self Assessment, making the net cost just £600 for a £1,000 pension investment. The annual allowance for pension contributions is £60,000 for 2025/26.

ISAs shelter up to £20,000 per tax year from income tax and capital gains tax. While ISA contributions are made from post-tax income, all growth, interest and dividends within the ISA wrapper are tax-free — making them especially valuable for higher-rate taxpayers who would otherwise pay 40% on savings interest above the £500 Personal Savings Allowance.

Marriage Allowance lets a non-taxpayer or basic-rate taxpayer transfer £1,257 (10% of their Personal Allowance) to their spouse or civil partner, saving up to £252 per year. You can backdate claims for up to four years. Gift Aid donations receive basic-rate relief at source, and higher-rate taxpayers can claim an additional 20% through Self Assessment.

For the self-employed, allowable business expenses reduce taxable profits directly. Common deductions include use of home as office (simplified flat rate of £6 per week or actual costs), business travel, professional subscriptions, and equipment. Salary sacrifice arrangements — where you give up part of your salary in exchange for employer pension contributions or other benefits — reduce your taxable pay and can also save National Insurance at 8% for employees and 15% for employers in 2025/26.

This article is for informational purposes only and does not constitute regulated financial advice. Tax rules, thresholds and allowances are subject to change. For personalised advice on your tax position, consult a qualified tax adviser or financial adviser.