Tax

Income Tax Explained UK — Beginner's Guide

Understanding UK income tax for beginners. How it works, tax bands, personal allowance, and how to work out what you'll pay.

By PocketWise · · 4 min read

Tax information is based on HMRC rules for the 2026/27 tax year. Tax rules can change — always verify current rates at GOV.UK. This is not tax advice. Consider consulting a qualified tax adviser for your personal situation.

UK income tax doesn’t have to be confusing. Here’s how it actually works.

How Income Tax Works

The Basic Principle

Concept How It Works
Personal Allowance First £12,570 is tax-free
Tax bands Different rates on different portions
Progressive system Higher earners pay higher percentage
PAYE Usually collected automatically

What Gets Taxed

Taxed Not Taxed
Salary and wages Personal Allowance amount
Self-employment profit ISA interest and growth
Pension income Premium Bond wins
Rental income Some benefits
Savings interest (above PSA) Employer pension contributions
Dividends (above allowance) Some redundancy pay

Tax Bands and Rates

Income Tax Rates 2024-25

Band Taxable Income 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%

Scotland Has Different Rates

Band Taxable Income Rate
Starter rate £12,571 to £14,876 19%
Basic rate £14,877 to £26,561 20%
Intermediate rate £26,562 to £43,662 21%
Higher rate £43,663 to £75,000 42%
Advanced rate £75,001 to £125,140 45%
Top rate Over £125,140 48%

Example Tax Calculations

£25,000 Salary

Portion Calculation Tax
First £12,570 Tax-free £0
Next £12,430 20% of £12,430 £2,486
Total — £2,486

£40,000 Salary

Portion Calculation Tax
First £12,570 Tax-free £0
Next £27,430 20% of £27,430 £5,486
Total — £5,486

£60,000 Salary

Portion Calculation Tax
First £12,570 Tax-free £0
£12,571-£50,270 20% of £37,700 £7,540
£50,271-£60,000 40% of £9,730 £3,892
Total — £11,432

£100,000 Salary

Portion Calculation Tax
First £12,570 Tax-free £0
£12,571-£50,270 20% of £37,700 £7,540
£50,271-£100,000 40% of £49,730 £19,892
Total — £27,432

Special Rules

£100,000+ Earners

Income What Happens
Over £100,000 Personal Allowance reduces
Reduction £1 for every £2 over £100k
£100,000-£125,140 Effective 60% marginal rate
Over £125,140 No Personal Allowance

Example: £110,000 Salary

Component Calculation
Over £100k by £10,000
Allowance reduction £5,000 (half)
Remaining allowance £7,570
Extra tax On lost £5,000 at 40% = £2,000

Effectively 60% tax on income between £100k-£125k.

Child Benefit Charge

Income What Happens
Over £60,000 Child Benefit charge kicks in
£60,000-£80,000 Charge is 1% per £200 over £60k
Over £80,000 Lose all Child Benefit

Personal Allowance Details

Standard Allowance

Year Amount
2024-25 £12,570
2025-26 £12,570 (frozen)
Previous years Lower

Other Allowances

Allowance Amount Who Gets It
Blind Person’s Allowance £3,070 Registered blind
Marriage Allowance £1,260 transfer Low earner to spouse

Allowance Reduces

Situation Effect
Income over £100,000 Allowance reduces
Income over £125,140 No Personal Allowance

How Tax Is Collected

PAYE (Most Employees)

Process What Happens
Employer calculates Tax based on your code
Deducted from pay Before you receive it
Monthly adjustment To hit annual target
Tax code tells employer Your allowances

Self Assessment

Who Needs It Details
Self-employed All
High earners (>£150k) Usually required
Rental income Yes
Multiple income sources Often yes
Untaxed income Yes

Deadlines

Deadline What For
5 October Register for Self Assessment
31 October Paper return deadline
31 January Online return + payment

Common Situations

Two Jobs

What Happens Details
Main job Gets your full allowance
Second job Usually taxed at 20% from £1
Tax code Different for each job
Check Correct codes applied

Benefits in Kind

Benefit Taxable?
Company car Yes
Private medical Yes
Gym membership Usually yes
Work mobile phone No (one phone)
Cycle to work scheme Tax advantage

Pension Contributions

Contribution Type Tax Relief
Workplace pension (salary sacrifice) Before tax
Personal pension Basic rate added automatically
Higher rate Claim via Self Assessment

Reducing Your Tax

Legitimate Ways

Method How It Works
Pension contributions Reduces taxable income
Salary sacrifice Pay for benefits pre-tax
ISAs Growth is tax-free
Marriage Allowance Transfer allowance
Gift Aid Higher rate gets relief

Common Tax Reliefs

Relief Who Benefits
Pension tax relief Everyone contributing
Working from home Employees required to WFH
Professional subscriptions If required for job
Uniform/tools If employer doesn’t pay

Summary: Key Points

Tax Rates to Remember

Band Rate
Personal Allowance (£0-£12,570) 0%
Basic rate (£12,571-£50,270) 20%
Higher rate (£50,271-£125,140) 40%
Additional rate (£125,140+) 45%

Important Numbers

Figure Amount
Personal Allowance £12,570
Basic rate band top £50,270
Allowance disappears at £125,140
60% trap zone £100,000-£125,140

Quick Actions

Action Why
Check your tax code Ensure correct allowance
Review payslip Tax calculated correctly
Use pension contributions Reduce taxable income
Claim work expenses If eligible
File Self Assessment If required, before deadline

Understanding income tax helps you keep more of what you earn and make smarter financial decisions.

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Sources

  1. HMRC — Income Tax