What is income tax in the UK and how does it work?

Full answer

Income tax is the UK's primary direct tax on individuals' earnings and other income. It is administered by HMRC and collected either through **PAYE** (automatically by employers) or via **Self Assessment** for those with complex tax affairs. **2026/27 income tax bands (England, Wales & Northern Ireland):** | Band | 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 | Above £125,140 | **45%** | **Personal Allowance taper:** If adjusted net income exceeds £100,000, the PA reduces by £1 for every £2 above — creating an effective 60% marginal rate between £100,000 and £125,140. **Scottish income tax (6 bands):** Scottish residents pay income tax to the Scottish Government at different rates: Starter 19%, Basic 20%, Intermediate 21%, Higher 42%, Advanced 45%, Top 48%. **Welsh income tax:** Welsh residents pay Welsh rates (same as England, C tax codes) — the Welsh Government has 10p rate-setting power. **Different rates for different income types:** - **Dividends:** 10.75% / 35.75% / 39.35% - **Savings interest:** 0% (PSA) then 20% / 40% / 45% - **Employment/pensions/rental:** Standard rates above **Effective vs marginal rate:** Because of the progressive structure, not all income is taxed at your highest rate. A £60,000 earner pays 0% on first £12,570, 20% on £37,700, and 40% on £9,730 — an effective rate of around **22%**, not 40%. **How PAYE works:** Most employees never file a tax return — their employer deducts tax each pay period based on their tax code and cumulative earnings.

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