Last Updated: October 2025 | Tax Year: 2025-2026

The UK tax system can seem complex, but understanding how it works is essential for managing your finances effectively. This guide explains everything you need to know about how HMRC administers taxes, income tax rates, and the PAYE system.

Quick Summary (TL;DR)

HMRC (Her Majesty's Revenue and Customs) administers the UK tax system
Income tax rates: 20% basic, 40% higher, 45% additional
Tax bands: Income split into brackets with different rates
PAYE system: Employers deduct tax automatically from salaries
Tax revenue: Funds public services like NHS, schools, defense
Tax-free allowance: £12,570 for 2025-26

Use our free UK tax calculator to calculate your exact tax liability.

What is the UK Tax System?

The UK tax system is the framework through which the government collects revenue to fund public services. It encompasses various taxes including income tax, National Insurance, VAT, corporation tax, capital gains tax, and inheritance tax.

Who Administers UK Taxes?

Her Majesty's Revenue and Customs (HMRC) is the UK's tax authority responsible for:

Collecting income tax and National Insurance
Managing the PAYE system for employees
Processing Self Assessment tax returns
Administering VAT, corporation tax, and other duties
Enforcing tax compliance and investigating tax avoidance

HMRC collects approximately £700 billion in tax revenue annually, which funds:

NHS (National Health Service)
Education and schools
Defense and security
Social welfare and pensions
Transport infrastructure
Public services

How Income Tax Works

Income tax is charged on your taxable income - the money you earn from employment, self-employment, pensions, and certain benefits after deducting your Personal Allowance.

Personal Allowance (Tax-Free Allowance)

For 2025-26, the Personal Allowance is £12,570. This means:

You pay £0 tax on your first £12,570 of income
Only earnings above this threshold are taxed
It's available to most UK taxpayers

Important: Your Personal Allowance reduces if you earn over £100,000:

Reduced by £1 for every £2 earned above £100,000
Completely lost when earning £125,140 or more

UK Income Tax Rates and Tax Bands 2025-26

The UK uses a progressive tax system where higher earnings are taxed at higher rates. Your income is divided into tax bands.

England, Wales & Northern Ireland

Tax Band	Income Range	Tax Rate	What You Pay
Personal Allowance	£0 - £12,570	0%	£0
Basic Rate	£12,571 - £50,270	20%	20p per £1
Higher Rate	£50,271 - £125,140	40%	40p per £1
Additional Rate	£125,140+	45%	45p per £1

Scotland

Scotland has different income tax bands but the same Personal Allowance:

Tax Band	Income Range	Tax Rate
Personal Allowance	£0 - £12,570	0%
Starter Rate	£12,571 - £15,397	19%
Basic Rate	£15,398 - £27,493	20%
Intermediate Rate	£27,494 - £43,662	21%
Higher Rate	£43,663 - £125,140	42%
Top Rate	£125,140+	48%

Key Point: You don't pay the same rate on all your income. Each portion (or "band") is taxed at its respective rate.

Understanding Tax Bands: How It Really Works

Many people think if they move into a higher tax bracket, all their income is taxed at that rate. This is wrong.

Example: £60,000 Salary

Let's break down how tax is calculated on a £60,000 salary:

£0 - £12,570: Taxed at 0% = £0 tax
£12,571 - £50,270: Taxed at 20% = £7,540 tax
£50,271 - £60,000: Taxed at 40% = £3,892 tax

Total income tax: £11,432

You're a "higher rate taxpayer" but only the portion above £50,270 is taxed at 40%.

The PAYE System Explained

PAYE (Pay As You Earn) is the system employers use to deduct income tax and National Insurance from your salary before you receive it.

How PAYE Works

Your employer receives your tax code from HMRC
They calculate your tax based on:
- Your salary
- Your tax code
- Your tax band
Tax is deducted monthly from your gross pay
Reported to HMRC through Real Time Information (RTI)
You receive net pay (salary after deductions)

Tax Codes Under PAYE

Your tax code tells your employer how much tax-free income you're entitled to. The standard tax code for 2025-26 is 1257L:

1257: Your Personal Allowance divided by 10 (£12,570 ÷ 10)
L: You're entitled to the standard tax-free allowance

Other common codes:

BR: All income taxed at basic rate (20%)
D0: All income taxed at higher rate (40%)
NT: No tax to pay
K: You have deductions that exceed your allowances
M: Marriage Allowance received
N: Marriage Allowance transferred

Learn more about tax codes

National Insurance: The Other Tax

National Insurance (NI) is collected alongside income tax through PAYE. It funds state benefits including:

State Pension
NHS
Unemployment benefits
Maternity/Paternity pay

National Insurance Rates 2025-26

For employees (Class 1 contributions):

Earnings	NI Rate
£0 - £12,570	0%
£12,571 - £50,270	12%
Above £50,270	2%

Example: On a £40,000 salary:

First £12,570: £0 NI
Next £27,430 (£12,571-£40,000): £3,292 NI (12%)
Total NI: £3,292

Effective Tax Rate vs Marginal Tax Rate

Understanding these concepts helps you make informed financial decisions.

Marginal Tax Rate

The rate you pay on your next £1 of income. If you earn £40,000, your marginal rate is 20% (plus 12% NI = 32% total).

Effective Tax Rate

Your average tax rate across all your income.

Example on £60,000:

Total tax: £11,432 (income tax) + £5,492 (NI) = £16,924
Effective rate: £16,924 ÷ £60,000 = 28.2%

Even though you're a higher rate taxpayer (40% marginal), your effective rate is only 28.2% because:

£12,570 is tax-free
£37,700 is taxed at only 20%
Only £9,730 is taxed at 40%

Calculate your effective tax rate

How Self-Employed People Pay Tax

Self-employed individuals don't use PAYE. Instead, they:

Register for Self Assessment with HMRC
Keep records of income and expenses
File a tax return by 31 January
Pay tax in two installments:
- 31 January (balancing payment + 1st payment on account)
- 31 July (2nd payment on account)

Self-employed people also pay Class 2 and Class 4 National Insurance instead of Class 1.

Read our Self Assessment guide

Other Taxes in the UK System

The UK tax system includes more than just income tax:

Capital Gains Tax (CGT)

Tax on profits when you sell assets like:

Property (except your main home)
Shares and investments
Business assets

Rates: 10% or 20% depending on income tax band

Inheritance Tax (IHT)

Tax on your estate when you die:

Threshold: £325,000 (nil-rate band)
Rate: 40% on value above threshold
Exemptions: Spouse, charity, business relief

Value Added Tax (VAT)

Sales tax charged on most goods and services:

Standard rate: 20%
Reduced rate: 5% (energy, children's car seats)
Zero rate: 0% (food, children's clothes)

Council Tax

Local tax to fund services in your area:

Based on property value bands
Set by local councils
Discounts available (single person, students)

Corporation Tax

Tax on company profits:

Rate: 25% for profits over £250,000
Small profits rate: 19% for profits under £50,000

How Tax Revenue is Used

HMRC collects around £700 billion annually. Here's where it goes:

Category	Approximate %
Social protection (pensions, benefits)	35%
Health (NHS)	20%
Education	12%
Debt interest	8%
Defense	5%
Public order (police, courts)	5%
Transport	4%
Other	11%

Understanding this helps put your tax contribution in context.

Tax Reliefs and Allowances

The UK tax system offers various reliefs to reduce your tax bill:

Marriage Allowance

Transfer £1,260 of unused Personal Allowance to your spouse:

Saves up to £252/year
Both must be basic rate taxpayers
How to claim Marriage Allowance

Pension Tax Relief

Contributions are deducted before tax:

Basic rate: Get 20% relief automatically
Higher rate: Claim extra 20% through tax return
Additional rate: Claim extra 25%

Savings Allowances

Tax-free interest on savings:

Basic rate: £1,000/year
Higher rate: £500/year
Additional rate: £0

Dividend Allowance

Tax-free dividends:

£500/year for all taxpayers (2025-26)
Above this: 8.75% (basic), 33.75% (higher), 39.35% (additional)

Scottish vs English Tax Systems

While the overall UK tax system is unified, Scotland has devolved powers over income tax rates.

Key Differences

Same Personal Allowance: £12,570
Different tax bands: Scotland has 5 bands, England has 3
Higher rates: Scots generally pay more above £28,000
Same National Insurance: NI rates are UK-wide

Example: On £50,000 salary:

England: £7,540 income tax
Scotland: £8,307 income tax
Difference: £767 more in Scotland

Full Scottish vs English comparison

Tax Year and Important Dates

The UK tax year runs from 6 April to 5 April (not calendar year).

Key Deadlines 2025-26

6 April 2025: New tax year starts
5 October 2025: Deadline to register for Self Assessment
31 October 2025: Paper tax return deadline
31 January 2026: Online tax return and payment deadline
31 July 2026: 2nd payment on account deadline
5 April 2026: Tax year ends

Miss these deadlines and you face automatic penalties.

How to Check Your Tax

Employed (PAYE)

Check payslips: Shows tax deducted monthly
P60: Annual tax summary from employer (by 31 May)
Personal Tax Account: Online HMRC portal
Tax code: Check it's correct (usually 1257L)

Self-Employed

Self Assessment statement: Online or post
Personal Tax Account: Full tax overview
Payment on account: Check amount due

Common Tax Mistakes to Avoid

1. Wrong Tax Code

Problem: Paying too much or too little tax
Solution: Check your tax code matches your circumstances

2. Not Claiming Tax Relief

Problem: Overpaying tax
Solution: Claim Marriage Allowance, pension relief, work expenses

3. Missing Self Assessment Deadline

Problem: £100 automatic penalty (plus daily fines)
Solution: File by 31 January, set calendar reminders

4. Not Understanding Tax Bands

Problem: Turning down pay rise thinking "it's all taxed at 40%"
Solution: Only the portion above £50,270 is taxed at 40%

5. Ignoring Scottish Tax Differences

Problem: Wrong tax calculations if Scottish
Solution: Use Scottish tax rates if you're a Scottish taxpayer

How Your Tax is Calculated: Step-by-Step

Example: £35,000 Salary (England)

Step 1: Calculate taxable income

Gross salary: £35,000
Minus Personal Allowance: £12,570
Taxable income: £22,430

Step 2: Apply income tax

£12,571 - £35,000 at 20% = £4,486
Total income tax: £4,486

Step 3: Calculate National Insurance

£12,571 - £35,000 at 12% = £2,692
Total NI: £2,692

Step 4: Calculate take-home

Gross: £35,000
Minus tax: £4,486
Minus NI: £2,692
Net annual: £27,822
Net monthly: £2,319

Calculate your exact take-home pay

Frequently Asked Questions

Is the UK tax system fair?

The UK uses a progressive system where higher earners pay higher rates. Whether it's "fair" is subjective, but:

Top 1% of earners pay ~28% of all income tax
Bottom 50% pay ~10% of all income tax
System redistributes wealth through benefits and services

Why is my tax code wrong?

Common reasons:

Started new job mid-year
Have multiple jobs
Receive benefits or expenses
HMRC doesn't have updated information

Solution: Contact HMRC or update via Personal Tax Account

Can I reduce my tax legally?

Yes, through:

Pension contributions
ISAs (tax-free savings)
Marriage Allowance
Salary sacrifice schemes
Charitable donations (Gift Aid)
Work expense claims

Do I pay tax on savings interest?

Depends on your savings allowance:

Basic rate: First £1,000 interest tax-free
Higher rate: First £500 interest tax-free
Additional rate: No allowance

How does tax work with multiple jobs?

Your Personal Allowance applies to one job (usually main job)
Second job often taxed at basic rate (BR code)
You might overpay and get a refund

Key Takeaways

✅ HMRC administers the UK tax system collecting ~£700bn annually
✅ Progressive tax rates: 0%, 20%, 40%, 45% on different income bands
✅ Personal Allowance: £12,570 tax-free for 2025-26
✅ PAYE system: Employers deduct tax automatically monthly
✅ Tax bands are marginal: Only income in each band taxed at that rate
✅ National Insurance: Separate from income tax, funds state benefits
✅ Effective tax rate: Usually much lower than marginal rate
✅ Tax reliefs available: Pension, marriage allowance, savings

Next Steps

1. Calculate Your Tax

Use our free UK tax calculator to see exactly how much tax you'll pay and your take-home pay.

2. Check Your Tax Code

Log into your Personal Tax Account and verify your tax code is correct.

3. Claim Tax Reliefs

Review available reliefs:

Marriage Allowance
Pension contributions
Work expenses

4. Understand Your Payslip

Learn to read your payslip and check deductions are correct.

Disclaimer

This guide provides general information about the UK tax system for the 2025-2026 tax year. Tax rules are complex and individual circumstances vary. For specific tax advice, consult HMRC or a qualified tax advisor. Our calculator uses official HMRC rates but is for guidance only.

Ready to calculate your tax? Use our free UK tax calculator for instant, accurate results based on official HMRC rates for 2025-26.