Personal allowances, PAYE bands, National Insurance classes, marriage allowance, Scottish rate differences, and the hidden 60% marginal rate trap between £100,000 and £125,140 — everything you need to understand how UK income tax works in 2025–26.
PAYE stands for Pay As You Earn. It is HMRC's system for collecting income tax and National Insurance directly from your wages or salary before you receive them. Your employer deducts the correct amount each pay period based on your tax code and pays it to HMRC on your behalf.
The UK tax year runs from 6 April to 5 April — different from most other countries. So the 2025–26 tax year covers 6 April 2025 to 5 April 2026. This means the end of the UK tax year falls mid-way through the calendar year, which matters for timing income and deductions.
Your tax code tells your employer how much tax-free income you're entitled to. The standard code for 2025–26 is 1257L, representing the £12,570 personal allowance. Different codes indicate adjustments for benefits in kind, underpaid tax, or other circumstances.
UK income tax for England, Wales, and Northern Ireland taxpayers in 2025–26:
| 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% |
Like Australia's system, UK income tax is progressive — you only pay each rate on the income within that band. A higher rate taxpayer on £60,000 does not pay 40% on all £60,000. They pay 0% on the first £12,570, 20% on £12,571–£50,270, and 40% only on £50,271–£60,000.
One of the most significant and least understood features of the UK tax system is the withdrawal of the Personal Allowance for higher earners — creating an effective 60% marginal tax rate band.
⚠️ The 60% Trap: For every £2 earned above £100,000, the Personal Allowance is reduced by £1. This means between £100,000 and £125,140, you are effectively taxed at 60% — because you lose £1 of tax-free allowance for every £2 of extra income. At £125,140, the Personal Allowance is entirely withdrawn. This is not mentioned in standard HMRC rate summaries and catches many higher earners off guard.
The practical impact: earning £1 more than £100,000 triggers not just 40% tax on that pound, but also the loss of 50p of Personal Allowance, which is also taxed at 40% — creating a combined 60% effective rate on income in this band. Pension contributions, salary sacrifice, and other mechanisms can potentially manage this — always with professional advice.
National Insurance (NI) is a separate tax on earnings that funds the State Pension, NHS, and certain benefits. Class 1 NI applies to employed earners.
| Earnings | Employee NI Rate |
|---|---|
| Below £12,570 (Primary Threshold) | 0% |
| £12,571 – £50,270 | 8% |
| Above £50,270 | 2% |
Employers also pay Class 1 NI — at 13.8% on earnings above the Secondary Threshold (approximately £9,100). This is a cost to the employer, not a deduction from your pay, but it increases the total employment cost above your gross salary.
Combined with income tax, the effective marginal rate for a basic-rate taxpayer (earning £12,571–£50,270) is 20% income tax + 8% NI = 28% on each additional pound earned. For higher rate taxpayers (£50,271–£100,000), it is 40% income tax + 2% NI = 42%.
Scotland has devolved income tax rates that differ from the rest of the UK. Scottish taxpayers pay different rates on non-savings, non-dividend income (broadly, employment income). National Insurance rates are the same across the UK.
| Band | Taxable Income | Scottish Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Starter Rate | £12,571 – £15,397 | 19% |
| Basic Rate | £15,398 – £27,491 | 20% |
| Intermediate Rate | £27,492 – £43,662 | 21% |
| Higher Rate | £43,663 – £75,000 | 42% |
| Advanced Rate | £75,001 – £125,140 | 45% |
| Top Rate | Over £125,140 | 48% |
Scottish taxpayers earning above approximately £28,000 generally pay more income tax than equivalent earners in England, Wales, and Northern Ireland. The Scottish Government uses the additional revenue to fund public services including free university tuition and free personal care for the elderly.
The Marriage Allowance allows one spouse or civil partner to transfer £1,260 of their unused Personal Allowance to the other, saving up to £252 in tax per year. It is available when one partner earns below the Personal Allowance (£12,570) and the other is a basic-rate taxpayer. It cannot be used if either partner pays the higher or additional rate. Applications are made through HMRC and can be backdated for up to four years.
Individual Savings Accounts (ISAs) allow UK residents to save or invest up to £20,000 per tax year completely free of UK income tax and capital gains tax. There are several types — Cash ISA, Stocks and Shares ISA, Lifetime ISA (for first-home buyers or retirement, up to £4,000), and Innovative Finance ISA. Returns within an ISA — whether interest, dividends, or capital gains — are not subject to UK tax. This makes ISAs one of the most powerful tax-efficient structures available to UK residents. For educational information on ISAs, visit gov.uk/individual-savings-accounts.
Your tax code tells your employer how much income you can receive before tax is deducted. The standard 2025–26 code is 1257L — the number 1257 means you have £12,570 of tax-free personal allowance, and the letter L indicates you're entitled to the standard allowance. Different letters indicate adjustments. If your tax code seems wrong, contact HMRC.
Most employed PAYE taxpayers do not need to file a Self Assessment return. However, you must file if you are self-employed, earn over £100,000, have untaxed income over £10,000 (such as rental income), are a company director, or have foreign income. Check HMRC's Self Assessment checker at gov.uk for your specific circumstances.
Employer pension contributions and personal contributions to a registered pension scheme receive tax relief. For a basic-rate taxpayer, a £100 pension contribution costs £80 — the government adds 20% tax relief. For higher-rate taxpayers, additional relief is available through Self Assessment. The annual pension allowance for 2025–26 is £60,000. Pension contributions can reduce your income into a lower tax band — important for those near the £100,000 personal allowance withdrawal zone.