How UK income tax works in 2026/27 — a plain-English guide

Income tax in 60 seconds

In the UK, you pay income tax on most of what you earn above a tax-free amount called the personal allowance (£12,570 for 2026/27). Above that, you pay tax at one of three rates if you live in England, Wales or Northern Ireland, or one of six if you live in Scotland. On top of that, employees pay National Insurance — a second tax, in all but name, that funds the State Pension and parts of the welfare system.

Tax is taken at source through your employer's PAYE (Pay As You Earn) system before your salary even hits your bank account. The figure on your payslip already reflects it.

The personal allowance — £12,570

The first £12,570 of your annual income is tax-free. That's your personal allowance, and it's been frozen at this level since April 2021 — currently scheduled to stay until April 2028. Frozen allowances mean inflation gradually pulls more people into tax (and into higher bands), which is why so many news stories talk about "fiscal drag".

The allowance is delivered to you through your tax code: most employees see 1257L, where 1257 is your personal allowance divided by ten, and L is the standard suffix.

The three tax bands (England, Wales & Northern Ireland)

Above the personal allowance, you pay tax at 20% basic rate, then 40% higher rate, then 45% additional rate for very high earners.

Tax is charged on each band only. If you earn £55,000, you don't suddenly pay 40% on everything — you pay 0% on the first £12,570, 20% on the next £37,700, and 40% on just the £4,730 above £50,270.

The £100k tax trap — why some people pay an effective 60%

Between £100,000 and £125,140, the personal allowance is tapered away. Every £2 you earn over £100,000 takes £1 off your tax-free allowance. By £125,140, your allowance is zero.

Mathematically this means that on every £100 of pay rise between £100k and £125,140 you keep about £40 — the equivalent of a 60% marginal tax rate (40% income tax + 20% from losing the allowance). It's the steepest hidden tax cliff in the UK system.

Practical implication: if you're paid £105,000, a £1,000 pension contribution doesn't just save you £400 in tax — it also restores £500 of personal allowance, so the real take-home benefit is around £600. We cover this in more depth in our (forthcoming) pension top-up guide.

Scottish income tax — six bands, set by Holyrood

Scotland sets its own income tax rates. National Insurance is still the same across the UK, but the income tax bands look very different — six tiers instead of three, with a starter rate below basic rate, then intermediate, higher, advanced and top rates.

Bands and rates are indicative for 2026/27 — Scotland sets these annually, so always verify with the Scottish Government before making big decisions. Higher-rate Scottish taxpayers pay 42% (against rUK's 40%), and "advanced" kicks in earlier at £75,001.

National Insurance — the other tax

If you're an employee, you also pay Class 1 National Insurance: 8% on earnings between £12,570 and £50,270, then 2% above that. NI isn't an income tax — historically it funded specific things — but in practice it works like one and stacks on top of your income tax.

Combined with income tax, a basic-rate worker pays an effective marginal rate of 28% (20% + 8%), and a higher-rate worker pays 42% (40% + 2%). In the £100k trap zone described above, the combined marginal hit reaches about 62%.

Worked examples

All figures assume a standard 1257L tax code, no pension contribution, no student loan, England/Wales/NI residency. Try the salary calculator with your own pension and student-loan settings for the figure that matches your payslip.

Tax codes — what 1257L actually means

Your tax code tells your employer how much tax-free pay to give you each pay period.

• 1257L — the standard code. 1257 = £12,570 allowance.
• BR — no allowance, everything taxed at basic rate (often used for a second job).
• D0 / D1 — everything taxed at higher / additional rate.
• K codes (e.g. K500) — your taxable income is increased by the number ×10 because of underpaid tax or taxable benefits.
• 0T — no allowance given (often emergency).

If your tax code looks wrong, check it via your HMRC personal tax account — getting it corrected mid-year can result in a refund.

Legally paying less tax

A handful of mainstream allowances move the needle materially:

• Pension contributions — every £80 of net pay you put into a pension becomes £100 once HMRC adds basic-rate relief. Higher-rate and additional-rate payers reclaim the rest through self-assessment. For higher earners in the £100k trap, the effective relief can exceed 60%.
• ISAs — you can save up to £20,000 per tax year, with no tax on interest, dividends or gains. Doesn't reduce your income tax bill, but it stops your savings being taxed again.
• Salary sacrifice — exchanging salary for pension contributions (or other benefits) reduces both your income tax and your NI. The most efficient way to top up a pension if your employer offers it.
• Marriage allowance — if one spouse earns under the personal allowance and the other is a basic-rate payer, you can transfer £1,260 of allowance — worth £252 a year.

Where to verify everything

Tax rules change. Always cross-check important figures against:

• gov.uk — income tax rates and personal allowance
• gov.uk — National Insurance rates and categories
• gov.scot — Scottish income tax for the current year
• MoneyHelper — free, impartial UK financial guidance

Disclaimer: This article is for illustrative and educational purposes only and is not financial, tax or legal advice. Rates and thresholds are correct to the best of our knowledge for the 2026/27 UK tax year but may change. For personalised advice please consult an FCA-authorised adviser, a chartered accountant or a solicitor.