How does UK tax work? Income Tax explained

The Personal Allowance

In the 2026/27 tax year, most people can earn £12,570 before paying any Income Tax. This is called the Personal Allowance. If you earn over £100,000, it starts to shrink.

Tax bands in England, Wales and Northern Ireland

Up to £12,570: 0%
£12,571 to £50,270: 20% (basic rate)
£50,271 to £125,140: 40% (higher rate)
Over £125,140: 45% (additional rate)

Scotland has its own bands and rates, so the figures there are different.

A common myth is that a pay rise into a higher band means all your pay is taxed more. It doesn't. Only the part above the line pays the higher rate, so a pay rise always leaves you better off.

A worked example: £30,000 a year

Tax-free (Personal Allowance)£12,570
Taxed at 20%£17,430

Income Tax: 20% of £17,430 = £3,486 a year, or £290.50 a month.

A £30,000 salary in England, Wales or Northern Ireland, 2026/27.

So on £30,000, you'd pay about £3,486 in Income Tax over the year, not 20% of the whole £30,000.

National Insurance

National Insurance is a separate deduction that builds your right to the State Pension and some benefits. In 2026/27, employees pay 8% on earnings between £12,570 and £50,270 a year, and 2% on anything above that. On £30,000, that's about £1,394 a year.

How you pay it: PAYE

If you're employed, your employer takes tax and National Insurance from your pay before it reaches you. This is called PAYE (Pay As You Earn). Your tax code tells your employer how much tax-free pay you get. If you have other income, such as a side hustle bringing in more than £1,000 a year before expenses, you may need to fill in a Self Assessment tax return.

Other taxes you might meet

On savings interest, above your Personal Savings Allowance.
On dividends from shares, above £500 a year.
On gains when you sell investments for a profit, above £3,000 a year.

Money inside an ISA or a pension is protected from these taxes while it stays there.

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Go further

Ready for the practical side? Read Understanding your payslip.

Sources

We checked this page against these sources on 9 October 2026. Rules and allowances can change, so always check the latest position on GOV.UK.

This page is general information, not personal financial advice. Read our full disclaimer.