How UK Income Tax Works: Thresholds, Bands and Tips

Taxes are a fact of life and income tax is usually the most significant for the majority of us. But UK income tax isn’t the same for everyone. UK income tax brackets put people into different categories, with different levels of taxation dependent on how much you earn. 

We also calculate and pay our income tax in different ways, either through our workplace or through self-assessment tax returns. There’s also the responsibility of employers to accurately deduct it from payslips and provide the right information to HMRC. 

Let’s take a look at how UK income tax works, including bands, personal allowance and how it is calculated.   

What is income tax? 

Put simply, UK income tax is a tax you pay on what you earn. This could be money you earn doing your job, income from renting out property, profit you make from being self-employed or things like pensions and other state benefits. 

The amount you pay depends on how much you earn, along with a few other factors. This is split up into what are known as tax bands, which dictate the rate you pay. As you earn more, you enter higher bands, so you pay more on specific portions of your income.  

Most people also get a Personal Allowance, which is an amount you don’t have to pay tax on. But we’ll dive into that later. 

There are also many types of earnings that aren’t subject to UK income tax, including interest from certain bank accounts such as Individual Savings Accounts (ISAs), some state benefits and National Lottery or premium bond wins.

How is income tax collected?  

HMRC collects income tax in a couple of ways, mainly depending on your employment status. Most people will pay their income tax through PAYE (Pay As You Earn), meaning their employer will deduct it from their salary using their tax code. 

The other way to pay UK income tax is through a Self Assessment, where you provide the details of your income from self-employment, rentals or other sources. 

Accuracy and timeliness are vital with both of these methods, with penalties being enforced for submitting late returns or not deducting the correct amounts. This is why it’s so important for business owners and leaders to understand their obligations when it comes to UK income tax and payroll. Even when you’re automating the process with software or outsourcing payroll to someone else, it’s still your legal responsibility to get it right.  

What is the personal allowance?

In the UK, Personal Allowance is the amount you can earn each financial year before you have to pay income tax. 

The standard Personal Allowance for the current tax year 2025/26 is £12,570. This is the same as the previous two years, but it can change from time to time due to the government setting new budgets and policies. So if your salary was £30,000 per year, you’d only pay income tax on £17, 430 of it.  

Your Personal Allowance also decreases if you earn more than £100,00, going down by £1 for every £2 over the threshold. This means it reduces to zero once you earn more than £125,140, meaning you’d pay income tax on all your earnings. 

UK income tax bands and rates 2025/26

In the UK, income tax is calculated using a system of tax bands. These bands determine how much tax you pay on different portions of your income. As your earnings increase, each portion falls into a specific band, with higher rates applying only to income above certain thresholds.

A common misconception is that moving into a higher tax band means you’ll pay that higher rate on all your income. In reality, each rate only applies to the income that falls within its range. For example, if you earn £55,000, you’ll pay 20% on the portion between £12,571 and £50,270, and 40% only on the amount above £50,271. Everything up to your Personal Allowance is tax-free.

This is how much you pay per tax band in the financial year 2025/26: 

Band	Taxable income	Tax 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%

Though income tax applies across the UK, the devolved governments can set their own rates or have slightly different tax bands. Currently, the Welsh government has set the income tax rates in Wales to match England, while Scotland has slightly different tax bands above the standard Personal Allowance. Income tax in Northern Ireland also currently matches the rates in England and Wales. 

How employers calculate and deduct income tax

Taxpayers in full-time employment usually have their income tax handled by the PAYE system. If you’re an employer or HR professional in charge of payroll, you’ll be very familiar with PAYE. 

PAYE is the way most people will pay their income tax as well as their National Insurance contributions. HMRC provides employers with tax codes to work out these amounts. You’ll find more about tax codes in our downloadable guide. 

The tax code gives the employer the information they need to figure out how much tax each employee owes. Employees will then see this information on their payslips, showing deductions like income tax and National Insurance as well as things like student loan repayments. 

What happens if employees overpay or underpay tax?

Accuracy is important when it comes to payroll and tax calculations, but mistakes can happen. Often, this can be due to internal admin errors or being sent the wrong tax code because of changing jobs, for example. Over 90% of UK businesses admit to making payroll errors every month, leading to thousands lost every year.  

An employee will only find out if they’ve underpaid or overpaid tax at the end of a tax year, after which HMRC will send a letter, known as a P800. These letters are sent out from June of the following tax year, so it can take some time before finding out if there’s an issue. The letter will tell the employee how to get a refund on overpaid tax or how to pay outstanding taxes owed. 

Usually, this can be done automatically by collecting owed taxes from their payslips in the subsequent year, while claiming a refund for overpaid tax can be done online. However, since April 2024, getting a tax refund via PAYE is no longer automatic and employees have to actively pursue a claim.  

Another type of HMRC communication on income tax discrepancies is known as a Simple Assessment letter, sent out if taxes are owed that exceed £3,000 or that can’t be automatically taken out of an employee’s income as normal. 

Refunds generally happen due to a change in circumstances sometime during the financial year, such as overlaps in leaving or starting a new job or gaps in employment. 

Underpaying tax can happen due to things like earning money outside of your usual employment or being put on an emergency tax code. 

Tips for employers managing PAYE

Managing PAYE as an employer can be done in a couple of ways, both manually and automatically through payroll software. While your payroll systems will take care of running the calculations, it’s good to have an idea of how PAYE works so you’ll be able to recognise errors if they happen. 

• Make sure your tax codes are accurate – The core of PAYE is using an employee’s tax code as provided by HMRC. This code dictates how much income tax an employee is liable for, so long as the information held by HMRC is correct. As an employer, you’ll be notified about any changes to an employee’s code. Applying the correct tax code is critical for an employer, so make sure your records are always up to date. 
• Use reliable payroll software – Payroll can be done in-house either manually or using payroll software, or you might outsource it to a provider. Either way, you’re legally responsible for completing PAYE tasks as part of doing payroll. Using a reliable and integrated payroll software system will make this much easier. 
• Keep up to date with RTI submissions – Payroll comes with submissions to HMRC, known as Real Time Information (RTI). This includes the Full Payment Submission (FPS), made every time you pay an employee. It’s vital you keep on top of these and pay them on time or you can be landed with fines. 
• Provide clear communication to employees – As with most aspects of managing a workforce, communication is key. Providing your employees with prompt information on pay is critical to maintain trust.

How Employment Hero can help 

Managing tax codes, PAYE, RTI and everything else that comes with payroll can take over your work life – but it doesn’t have to. Using Employment Hero’s payroll services can make staying compliant simple and scalable. Whether you’re just starting out or your business is growing to new heights, we have the solution to suit your needs. 

From payroll software to outsourcing, we can make payroll effortless. Talk to us today to find out how.