How UK income tax works
A plain-English guide to PAYE income tax: what you pay, on what, and why your payslip looks the way it does.
What is income tax?
Income tax is a tax on your earnings collected by HMRC (His Majesty's Revenue and Customs). If you are employed, it is deducted automatically from each payslip under the PAYE (Pay As You Earn) system — you never need to send a cheque to HMRC yourself.
Not all of your income is taxed. You have a personal allowance — an amount you can earn each year completely free of income tax.
The 2026/27 tax bands
Once your income exceeds the personal allowance, the rest is taxed in bands. Each band has its own rate. Crucially, you only pay the higher rate on the portion of income that falls within that band — not on your entire salary.
| Band | Taxable income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Worked example: £45,000 salary
| Gross salary | £45,000 |
| Less personal allowance | − £12,570 |
| Taxable income | £32,430 |
| Basic rate tax (20% × £32,430) | £6,486 |
| Total income tax | £6,486 |
| Effective rate | 14.4% of gross |
Worked example: £65,000 salary
| Gross salary | £65,000 |
| Less personal allowance | − £12,570 |
| Taxable income | £52,430 |
| Basic rate tax (20% × £37,700) | £7,540 |
| Higher rate tax (40% × £14,730) | £5,892 |
| Total income tax | £13,432 |
| Effective rate | 20.7% of gross |
The personal allowance taper above £100,000
If your adjusted net income exceeds £100,000, your personal allowance reduces by £1 for every £2 of income above that threshold. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140 — a trap many higher earners fall into.
Once income reaches £125,140, the personal allowance is fully withdrawn and the 45% additional rate applies to all income above that level.
What is a tax code?
Your tax code tells your employer how much personal allowance to give you. The standard code for 2026/27 is 1257L — the number represents £12,570 ÷ 10.
- 1257L — standard personal allowance, most employees
- BR — all income taxed at basic rate (20%), used for second jobs
- D0 — all income taxed at higher rate (40%)
- NT — no tax deducted (rare, e.g. non-UK residents)
- W1 / M1 — emergency tax code; tax calculated on a week-by-week basis
If your tax code is wrong, you could be overpaying or underpaying. Check it on your payslip and contact HMRC if it looks incorrect.
The difference between marginal and effective rate
People often confuse these two rates. Your effective tax rate is the total tax you pay as a percentage of your gross salary. Your marginal rateis the rate you pay on the next pound you earn.
For example, on a £55,000 salary your effective rate might be around 22%, but your marginal rate is 40% — because any additional income falls into the higher-rate band. This matters when considering overtime, bonuses, or side income.
Income tax vs National Insurance
Income tax and National Insurance (NI) are separate deductions. NI is not income tax — it funds the NHS and state pension. Both appear on your payslip as separate lines. Together they make up the majority of what most employees pay to the government each month.
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