Income Tax and Personal Allowance Explained
Understand How Your Earnings Are Taxed in the UK – A Simple, Clear Guide.
What Is Income Tax?
Income tax is a tax on your earnings. In the UK, it applies to money you earn from employment, pensions, self-employment, rental income, and certain savings and investments. It is collected by HM Revenue and Customs (HMRC) and helps fund public services such as the NHS, education, and transport infrastructure.
You’ll only pay income tax once your income exceeds a certain threshold, known as your Personal Allowance.
What Is the Personal Allowance?
The Personal Allowance is the amount of income you can earn each tax year tax-free. For the tax year 2025/26, the standard Personal Allowance is:
This means you won’t pay income tax on the first £12,570 of your earnings. Anything above this is taxed at different rates depending on how much you earn.
When Does the Personal Allowance Change?
Your Personal Allowance may be lower if:
You earn over £100,000 a year – the allowance is reduced by £1 for every £2 you earn over this threshold.
You owe tax from a previous year or receive taxable benefits.
It may be higher if:
You claim certain allowances, such as the Marriage Allowance or Blind Person’s Allowance.
Income Tax Bands and Rates 2025/26
The amount of income tax you pay depends on how much you earn above your Personal Allowance. The UK uses a progressive tax system, meaning the more you earn, the higher the rate you pay on the next portion of your income.
| Income Range | Tax Band | Tax Rate |
|---|---|---|
| Up to £12,570 | Personal Allowance | 0% |
| £12,571 – £50,270 | Basic Rate | 20% |
| £50,271 – £125,140 | Higher Rate | 40% |
| Over £125,140 | Additional Rate | 45% |
What Income Is Taxable?
You may need to pay tax on income from:
Employment (salary, bonuses, benefits-in-kind)
Self-employment
Pensions
Rental income
Bank interest over the savings allowance
Dividends over the dividend allowance
Non-Taxable Income Includes:
ISA interest
Premium Bond prizes
Lottery winnings
Some state benefits (e.g. Housing Benefit, Disability Living Allowance)
How Income Tax Is Collected
PAYE (Pay As You Earn)
If you’re employed, tax is usually deducted automatically through the PAYE system by your employer. This is reflected in your payslip.
Self-Assessment
If you’re self-employed or have complex tax affairs (such as rental income or large dividends), you must file a Self Assessment tax return.
Example: Income Tax Calculation
Let’s look at an example for someone earning £40,000:
Personal Allowance: £12,570 (tax-free)
Taxable income: £40,000 – £12,570 = £27,430
Tax due at 20%: £27,430 × 0.20 = £5,486
What If You Have More Than One Job?
If you have multiple sources of income, only one job can use your full Personal Allowance. The second job usually has a different tax code (often BR or 0T) and is taxed at 20% or more from the first £1.
You can contact HMRC to adjust your tax code so your allowance is split more fairly between your jobs.
Understanding Your Tax Code
Your tax code determines how your Personal Allowance is applied. Common codes include:
1257L – Standard code for most people
BR – Basic rate applied to all income (no allowance)
0T – No personal allowance used
Understanding your code helps avoid overpaying or underpaying tax.
How to Check and Manage Your Income Tax
Log in to your HMRC Personal Tax Account to see your tax code, PAYE history, and manage Self Assessment.
Update your employment details or address.
Correct any mistakes in your tax record.
Tax Reliefs and Allowances You Might Be Missing
You might reduce your tax bill with the following:
| Relief or Allowance | Potential Benefit |
|---|---|
| Marriage Allowance | Transfer up to £1,260 of allowance to your spouse |
| Blind Person’s Allowance | Additional tax-free amount (£2,870 for 2025/26) |
| Pension Contributions | Receive tax relief on personal pension payments |
| Gift Aid Donations | Increase the value of charitable donations |
Final Thoughts
Understanding how Income Tax and Personal Allowance work is key to managing your finances and making sure you're not paying more than you need to. If your income situation is complex or changes often, consider speaking to a tax adviser or accountant.