What Is Income Tax?

Income tax raises more money for the UK government than any other single tax, and almost every working adult pays it. Yet ask people how it actually works, where their allowance comes from, why a pay rise sometimes feels disappointing, or why Scotland is different, and the answers get vague fast.

How Income Tax Works

Income tax is charged on a wide range of income: employment earnings, self-employment profit, most pensions, rental income, and savings and dividend income above their own separate allowances. The first thing the system does is shield part of your income with the Personal Allowance, £12,570 in 2026/27. Only what you earn above that is taxable.

Above the allowance, your income passes through a series of tax bands, and a higher rate applies to each successive slice. Crucially, moving into a higher band does not raise the rate on your whole income, only on the portion that falls within that band. This is why a pay rise never leaves you worse off overall, despite the common myth.

The 2026/27 Rates and Bands

For taxpayers in England, Wales and Northern Ireland, the 2026/27 structure is:

These thresholds are frozen until 2028, so as wages rise, more income is dragged into higher bands, an effect known as fiscal drag.

Fiscal Drag

The effect of leaving tax thresholds frozen while incomes rise with inflation and wage growth. Because the £12,570 allowance and £50,270 higher-rate threshold are not increasing, more of each person's income is pulled into taxable territory or into higher bands over time, raising the effective tax burden without any change to the headline rates.

Scotland Sets Its Own Rates

Income tax on earnings is devolved to the Scottish Parliament, so Scottish taxpayers (identified by an S prefix on their tax code, such as S1257L) follow a different set of bands in 2026/27: a 19% starter rate, a 20% basic rate, a 21% intermediate rate, a 42% higher rate, a 45% advanced rate from £75,000, and a 48% top rate above £125,140. The Personal Allowance itself remains a UK-wide £12,570, but the rates applied above it diverge. Wales has the power to set Welsh rates (Welsh taxpayers carry a C prefix), but for 2026/27 Welsh rates match those of England and Northern Ireland.

Worked Example: A £60,000 Salary

Maya earns £60,000 in 2026/27 in England. Her first £12,570 is covered by the Personal Allowance and taxed at 0%. The next slice, from £12,571 to £50,270 (£37,700), is taxed at the basic rate of 20%, giving £7,540. The remaining £9,730 (from £50,271 to £60,000) falls in the higher-rate band and is taxed at 40%, giving £3,892.

Her total income tax is £7,540 + £3,892 = £11,432, an effective rate of about 19% across her whole salary, even though her top (marginal) rate is 40%. National Insurance is charged separately. Run any salary through the income tax and salary calculator to see the full breakdown including take-home pay.

“Moving into the higher-rate band only taxes the pounds above the threshold, never your whole income. A pay rise always leaves you better off.”

How You Pay It

Most employees and pensioners never handle income tax directly; it is deducted automatically through PAYE before they are paid, based on their tax code. The self-employed, landlords, and people with significant untaxed income instead report it through Self Assessment after the tax year ends and pay HMRC directly. From April 2026, Making Tax Digital for Income Tax begins phasing in, requiring sole traders and landlords with qualifying income over £50,000 to keep digital records and send HMRC quarterly updates rather than a single annual return.

People also ask

What income is not subject to income tax?

Several types of income are tax-free, including ISA interest and gains, the first £12,570 covered by your Personal Allowance, some state benefits, premium bond prizes, and income within the separate savings and dividend allowances. The £1,000 trading allowance and £1,000 property allowance can also exempt small amounts of self-employment or rental income from tax.

Is income tax the same across the whole UK?

No. Income tax on earnings is devolved to Scotland, which sets its own rates and bands, generally with more bands and some higher rates than the rest of the UK. Wales has the power to vary rates but has kept them in line with England and Northern Ireland for 2026/27. The Personal Allowance and the tax on savings and dividends remain UK-wide.

Do I pay income tax and National Insurance on the same income?

Often yes. Earned income from employment or self-employment can be subject to both income tax and National Insurance contributions, but they are calculated separately with different thresholds. Some income, such as pensions, rental income and dividends, is subject to income tax but not National Insurance, which is why your total deductions depend on the type of income you receive.