The UK tax system is based on a "progressive" model, meaning you pay higher rates of tax as your income grows. For the 2025/26 tax year, the thresholds and rates remain a critical factor in personal financial planning. This guide provides a detailed breakdown of how your salary is taxed, from the first pound of your Personal Allowance to the Additional Rate threshold.
1. The Personal Allowance
The Personal Allowance is the amount of income you can earn before you start paying Income Tax. For 2025/26, the standard Personal Allowance is £12,570. This has been frozen since 2021, which effectively means more people are pulled into higher tax brackets as wages rise (a phenomenon known as fiscal drag).
The Personal Allowance Taper (£100k+ earners)
If you earn more than £100,000, your Personal Allowance starts to decrease. For every £2 you earn above £100,000, you lose £1 of your allowance. This creates a "hidden" tax rate of 60% in the zone between £100,000 and £125,140. Once you earn £125,140 or more, your Personal Allowance is zero.
2. Income Tax Bands (England, NI & Wales)
Income Tax is applied in slices. You only pay the higher rate on the portion of your income that falls within that band.
| Band | Taxable Income | Tax 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% |
3. National Insurance Contributions (NICs)
National Insurance is often called the "second income tax." It funds the NHS, state pensions, and certain benefits. For employees (Class 1), the rates for 2025/26 are:
- 8% on earnings between £12,570 and £50,270 per year (the Primary Threshold).
- 2% on earnings above £50,270.
Combined with Income Tax, a Basic Rate payer effectively pays 28% (20% + 8%) on their earnings above the threshold, while a Higher Rate payer pays 42% (40% + 2%).
4. Student Loan Repayments
If you have a student loan, repayments are deducted automatically from your salary via PAYE. The amount you pay depends on which "Plan" you are on:
- Plan 1: 9% of income over £24,990.
- Plan 2: 9% of income over £27,295.
- Plan 4 (Scotland): 9% of income over £31,395.
- Plan 5: 9% of income over £25,000.
- Postgraduate Loan: 6% of income over £21,000.
Crucially, if you have both a Plan 2 and a Postgraduate loan, you will pay a combined 15% (9% + 6%) on your income above the thresholds.
5. Pension Relief and Salary Sacrifice
One of the most effective ways to reduce your tax bill is through pension contributions. There are two main ways this works:
Relief at Source
You pay into your pension from your net (after-tax) pay. Your pension provider then claims 20% tax relief back from the government. If you are a Higher Rate taxpayer, you must claim the additional 20% relief back yourself via a Self Assessment tax return.
Salary Sacrifice
You agree to "give up" a portion of your gross salary in exchange for an employer pension contribution. Because your gross salary is lower, you pay less Income Tax and less National Insurance. This is usually the most tax-efficient way to save for retirement.
6. Marriage Allowance and Other Credits
- Marriage Allowance: Allows you to transfer £1,260 of your Personal Allowance to your husband, wife, or civil partner, potentially saving up to £252 per year. This is only available if one partner earns less than the Personal Allowance and the other is a Basic Rate taxpayer.
- Blind Person's Allowance: An additional £3,070 of tax-free allowance if you are registered as blind.
7. High Income Child Benefit Charge (HICBC)
If you or your partner earn over £60,000 and receive Child Benefit, you may have to pay a tax charge. The charge is 1% of the Child Benefit for every £200 of income between £60,000 and £80,000. Once your income hits £80,000, the charge equals the full amount of Child Benefit received.
Frequently Asked Questions
What is the 60% tax trap?
It occurs between £100,000 and £125,140 because you lose £1 of your tax-free Personal Allowance for every £2 earned. This loss of allowance, combined with the 40% Higher Rate tax, creates an effective 60% tax rate on that slice of income.
Does everyone get a Personal Allowance?
Most UK residents do, but it is reduced if your income is over £100,000. Non-residents may or may not be entitled to it depending on their country of residence and the specific tax treaty with the UK.
How does the Scottish tax system differ?
Scotland has its own tax bands, including a 19% Starter Rate and 21% Intermediate Rate. The Higher Rate in Scotland starts at a lower threshold (£43,663) compared to the rest of the UK (£50,270).
Ready to see your exact take-home pay? Use our UK Salary Calculator for an instant breakdown.