Income Tax Explained Simply

The simple version

Income tax is charged in bands. You don’t pay one flat rate on all your income — you pay different rates on different portions. Think of it like filling buckets: you fill the lower-rate buckets first, then overflow into higher-rate ones.

The first £12,570 of income is completely tax-free. This is the Personal Allowance.

UK income tax bands (2025/26)

Note: Scotland has different income tax rates and bands set by the Scottish Parliament.

Example: on a salary of £40,000, you pay 0% on the first £12,570, then 20% on the remaining £27,430. Your income tax bill is roughly £5,486 per year (£457/month). Not 20% of the full £40,000.

The Personal Allowance and the £100k trap

The standard Personal Allowance is £12,570. But it starts to reduce once your income exceeds £100,000 — you lose £1 of allowance for every £2 you earn above that level.

By the time you earn £125,140, the Personal Allowance is gone entirely. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140 — one of the strangest quirks of the UK tax system.

Under HMRC rules, pension contributions reduce adjusted net income, which is the figure used to calculate Personal Allowance abatement. HMRC publishes full guidance on the £100,000 threshold and its effects at gov.uk/income-tax-rates.

How PAYE works

If you’re employed, your employer deducts income tax from your wages each payslip via PAYE (Pay As You Earn). Your employer gets your tax code from HMRC, which tells them how much to deduct.

The standard tax code is 1257L — the ‘L’ means you get the standard Personal Allowance, and 1257 represents £12,570 (drop the last digit). Other letters mean different things: ‘M’ and ‘N’ relate to Marriage Allowance, ‘K’ means your untaxed income exceeds your allowances, ‘BR’ means everything is taxed at basic rate (often a second job).

Check your payslip — if your tax code looks wrong, contact HMRC or check the HMRC app. The wrong tax code means you may be paying too much or too little tax.

What counts as income?

Income tax applies to more than just your salary:

• Employment income — salary, bonuses, benefits in kind
• Self-employment profits
• Rental income from property
• Savings interest above the Personal Savings Allowance
• Dividends above the Dividend Allowance (£500 in 2025/26)
• Pension income (once you start drawing it)

Income inside an ISA or pension is largely protected from income tax.

How HMRC calculates taxable income

HMRC’s rules mean several things reduce the income figure used to calculate income tax:

• Pension contributions: contributions to a registered pension scheme reduce your taxable income under HMRC rules. Relief is given at your marginal rate.
• Marriage Allowance: a government scheme allowing one spouse or civil partner to transfer £1,260 of their unused Personal Allowance to the other, where the recipient is a basic-rate taxpayer. Eligibility rules and the application process are on gov.uk/marriage-allowance.
• Gift Aid: under HMRC rules, Gift Aid donations extend the basic-rate tax band, affecting the boundary at which higher-rate tax applies. Guidance is on gov.uk.
• Salary sacrifice: HMRC allows certain benefits provided through salary sacrifice arrangements (such as pension contributions and cycle-to-work schemes) to reduce the taxable pay figure. The employer determines which schemes are offered. HMRC publishes guidance on qualifying arrangements at gov.uk.