Understanding the UK Income Tax System for 2025-2026
Introduction to UK Income Tax
Income tax is one of the most significant forms of taxation in the UK, applying to earnings from employment, self-employment, pensions, rental income, savings interest, and dividends. The UK operates a progressive tax system, meaning the more you earn, the higher the rate at which you’re taxed.
Who Pays Income Tax?
If you are a UK resident and earn above a certain threshold, you are required to pay income tax. It applies to:
- Employees (through PAYE deductions from salaries).
- Self-employed individuals (via self-assessment tax returns).
- Pensioners receiving taxable pension income.
- Landlords with rental earnings above the tax-free allowance.
- Investors earning dividends or interest exceeding the tax-free savings allowance.
Income Tax Year 2025-2026
The UK tax year runs from 6 April 2025 to 5 April 2026. This means the income tax rates and allowances apply to income earned during this period.
Income Tax Brackets and Rates for 2025-2026
The income tax structure is based on tax bands. Below are the latest tax bands and rates applicable in England, Wales, and Northern Ireland:
| Band | Taxable Income (£) | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% (tax-free) |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Key points to note:
- If you earn £100,000 or more, your Personal Allowance is reduced by £1 for every £2 earned over this amount.
- Those earning above £125,140 will lose their Personal Allowance entirely.
- The tax bands remain unchanged from the 2024-2025 tax year.
Scotland’s Income Tax System
Scotland has a different tax system, with five income tax bands rather than three. The updated rates for Scotland for 2025-2026 are:
| Scottish Tax Band | Taxable Income (£) | Tax Rate |
|---|---|---|
| Starter Rate | £12,571 – £14,732 | 19% |
| Basic Rate | £14,733 – £25,688 | 20% |
| Intermediate Rate | £25,689 – £43,662 | 21% |
| Higher Rate | £43,663 – £125,140 | 42% |
| Top Rate | Over £125,140 | 47% |
Scotland’s system results in slightly higher taxation for middle-income earners compared to the rest of the UK.
Example Scenarios
- Employee earning £45,000 (England)
- First £12,570 – tax-free (Personal Allowance).
- Next £32,430 taxed at 20% = £6,486.
- Total tax = £6,486.
- Self-employed individual earning £60,000 (England)
- First £12,570 – tax-free.
- Next £37,700 taxed at 20% = £7,540.
- Remaining £9,730 taxed at 40% = £3,892.
- Total tax = £11,432.
Tax-Free Allowances, Deductions, and Reliefs in 2025-2026
Understanding Tax-Free Allowances
In the UK, not all income is subject to tax. Taxpayers benefit from various allowances and reliefs that reduce their taxable income. Below are the key allowances available for 2025-2026.
1. Personal Allowance
The Personal Allowance remains at £12,570, meaning individuals do not pay tax on income below this threshold. However:
- If earnings exceed £100,000, the allowance is reduced by £1 for every £2 earned above this limit.
- For those earning above £125,140, the Personal Allowance is completely lost.
2. Marriage Allowance
Marriage Allowance allows lower-income partners to transfer a portion of their Personal Allowance (£1,260) to their spouse or civil partner, reducing the recipient’s tax by up to £252 in 2025-2026.
Example:
- John earns £10,000 (below the Personal Allowance).
- His wife, Sarah, earns £40,000.
- John transfers £1,260 of his allowance to Sarah, reducing her tax bill by £252.
3. Blind Person’s Allowance
Individuals registered as blind get an extra £3,070 tax-free income in 2025-2026, bringing their total Personal Allowance to £15,640.
4. Trading and Property Allowances
- Trading Allowance: Up to £1,000 of self-employment income is tax-free.
- Property Allowance: Rental income up to £1,000 is tax-free (except for Rent-a-Room Scheme users).
5. Savings Allowance
The Personal Savings Allowance (PSA) enables taxpayers to earn a portion of interest on savings without tax:
- Basic rate taxpayers – Up to £1,000 interest tax-free.
- Higher rate taxpayers – Up to £500 interest tax-free.
- Additional rate taxpayers – No PSA.
6. Dividend Allowance
Shareholders receive £500 in tax-free dividends for 2025-2026. Beyond this, dividends are taxed at:
- 8.75% (Basic Rate taxpayers)
- 33.75% (Higher Rate taxpayers)
- 39.35% (Additional Rate taxpayers)
Key Income Tax Deductions and Reliefs
Deductions and reliefs allow taxpayers to reduce their taxable income, lowering their overall tax bill.
1. Pension Contributions
- Contributions to workplace pensions qualify for tax relief at an individual’s highest tax rate.
- Example: A higher-rate taxpayer investing £10,000 into a pension gets £4,000 tax relief, meaning they effectively contribute only £6,000.
2. Gift Aid Donations
- Charitable donations made under Gift Aid allow charities to claim an extra 25% from the government.
- Higher and Additional Rate taxpayers can claim extra tax relief.
3. Work-Related Expenses and Tax Relief
Certain expenses incurred for employment qualify for tax relief, including:
- Uniforms and work clothing (e.g., police officers, nurses).
- Professional fees and subscriptions (e.g., membership to HMRC-approved professional bodies).
- Homeworking costs (for remote employees).
4. Rent-a-Room Scheme
Homeowners renting a furnished room can earn up to £7,500 tax-free per year.
5. Capital Gains Tax (CGT) Exemption
The Capital Gains Tax exemption remains at £3,000 for 2025-2026. This applies to profits from selling assets like property or shares.
How Income Tax is Collected and What Happens If You Don’t Pay on Time
How Income Tax is Collected in the UK
The UK government collects income tax through different methods depending on how an individual earns their income. The two primary ways are:
- Pay As You Earn (PAYE) – For Employees and Pensioners
- Self-Assessment – For the Self-Employed, Landlords, and High Earners
1. PAYE: How Employees and Pensioners Pay Tax
The Pay As You Earn (PAYE) system is used to collect income tax directly from salaries, wages, and pensions. Employers and pension providers deduct tax before paying individuals, ensuring most taxpayers don’t need to file tax returns.
How PAYE Works
- Every employee has a tax code (e.g., 1257L for most people in 2025-2026).
- Employers use this tax code to determine how much income tax should be deducted each month.
- PAYE deductions also include National Insurance Contributions (NICs), student loan repayments, and pension contributions.
Example: PAYE Calculation for 2025-2026
Let’s assume Alice earns £45,000 per year.
- The first £12,570 is tax-free (Personal Allowance).
- The next £32,430 is taxed at 20% = £6,486.
- Alice’s monthly tax deduction = £6,486 ÷ 12 = £540.50.
Employers handle the deductions, so Alice receives her salary after tax has been taken out.
2. Self-Assessment: For the Self-Employed, Landlords, and High Earners
If you are self-employed, earn rental income, or receive untaxed income, you must report and pay your tax through Self-Assessment.
Who Needs to Register for Self-Assessment?
You must register for Self-Assessment if you:
- Earn over £1,000 from self-employment.
- Have rental income over £1,000 per year (excluding the Rent-a-Room Scheme).
- Receive dividends, savings interest, or foreign income above tax-free allowances.
- Earn over £100,000 per year (even if taxed through PAYE).
Deadlines for Self-Assessment
| Deadline | What to Do |
|---|---|
| 5 October 2025 | Register for Self-Assessment (if new to it). |
| 31 January 2026 | File an online tax return for income earned in 2024-2025. |
| 31 January 2026 | Pay any tax due for 2024-2025. |
| 31 July 2026 | Pay the second instalment if on Payments on Account. |
Failing to meet these deadlines can result in penalties and interest charges.
What Happens If You Don’t Pay Tax on Time?
If you miss a tax payment deadline, HMRC applies late payment penalties and interest charges.
1. Late Filing Penalties
- Miss the 31 January deadline? You get a £100 penalty immediately.
- 3 months late? Additional £10 per day penalty (up to £900).
- 6 months late? An extra £300 fine or 5% of tax due (whichever is higher).
- 12 months late? Another £300 fine or up to 100% of tax due.
2. Late Payment Penalties
- 30 days late: 5% of the unpaid tax.
- 6 months late: Another 5% penalty.
- 12 months late: A further 5% penalty.
- Interest is also charged daily on unpaid tax.
What If You Can’t Pay Your Tax Bill?
If you’re struggling to pay, HMRC offers options like:
- Time to Pay Arrangements – Allows spreading payments over months.
- Reducing Payments on Account – If you expect lower earnings, you can reduce advance tax payments.
Example: Tax Payment Plan
David, a self-employed graphic designer, owes £6,000 in tax. He sets up a Time to Pay plan with HMRC to pay £500 per month over a year. This helps avoid penalties while clearing his debt.
Income Tax for Businesses and the Self-Employed in the UK (2025-2026)
How Businesses and the Self-Employed Pay Income Tax
Unlike employees who have their tax deducted through PAYE, self-employed individuals and business owners must calculate and pay their taxes themselves. This applies to:
- Sole traders – Individuals running their own business.
- Partners in a business partnership – Each partner is responsible for their share of tax.
- Company directors and shareholders – If they take a salary and dividends.
The main tax obligations for businesses and self-employed people include:
- Income Tax (on profits for sole traders and partnerships).
- National Insurance Contributions (NICs).
- VAT (if turnover exceeds the threshold).
- Corporation Tax (for limited companies).
1. Income Tax for Sole Traders and Partnerships
Sole traders and business partners pay Income Tax on profits, not revenue.
How Tax is Calculated for Self-Employed Individuals
- Total business income – All earnings from self-employment.
- Deduct allowable expenses – Such as office costs, travel, and advertising.
- Calculate taxable profit – The amount subject to Income Tax and NICs.
Example: Self-Employed Tax Calculation (2025-2026)
Emily runs an online shop. In 2025-2026, her business finances look like this:
| Business Revenue | £85,000 |
|---|---|
| Allowable Expenses | £30,000 |
| Taxable Profit | £55,000 |
- First £12,570 (Personal Allowance) – tax-free.
- Next £37,700 (Basic Rate) – Taxed at 20% = £7,540.
- Remaining £4,730 (Higher Rate) – Taxed at 40% = £1,892.
- Total Tax Due = £9,432.
2. National Insurance for the Self-Employed (2025-2026)
Self-employed individuals must also pay National Insurance Contributions (NICs) based on their earnings.
| NIC Type | Who Pays? | Rate (2025-2026) |
|---|---|---|
| Class 2 NICs | Profits over £12,570 | £3.45 per week |
| Class 4 NICs | Profits over £12,570 | 9% on £12,571–£50,270; 2% on profits over £50,270 |
Example: NIC Calculation
- Emily’s taxable profit = £55,000.
- Class 2 NICs = £3.45 x 52 weeks = £179.40.
- Class 4 NICs =
- 9% on £37,700 = £3,393.
- 2% on £4,730 = £94.60.
- Total NICs = £3,667.
Emily’s total tax + NICs = £9,432 + £3,667 = £13,099.
3. Income Tax for Limited Companies
Limited companies do not pay Income Tax on profits. Instead, they pay Corporation Tax (CT).
| Corporation Tax Rate (2025-2026) | Taxable Profits (£) | Tax Rate |
|---|---|---|
| Small Profits Rate | Up to £50,000 | 19% |
| Main Rate | Over £250,000 | 25% |
| Marginal Rate | £50,001 – £250,000 | Between 19% and 25% |
Example: Corporation Tax Calculation (2025-2026)
A company with £150,000 taxable profits pays tax as follows:
- First £50,000 @ 19% = £9,500.
- Remaining £100,000 @ 25% = £25,000.
- Total Corporation Tax = £34,500.
4. VAT and Income Tax for Businesses
Businesses with a turnover above £90,000 must register for VAT (Value Added Tax). VAT rates:
- Standard Rate – 20% (most goods/services).
- Reduced Rate – 5% (e.g., energy bills).
- Zero Rate – 0% (e.g., children’s clothes).
Example: VAT Impact on a Business
- A furniture shop with £150,000 in sales charges £30,000 VAT (£150,000 x 20%).
- If expenses include £50,000 with £10,000 VAT paid, they can reclaim this.
- Net VAT payable to HMRC: £30,000 – £10,000 = £20,000.
5. Tax Deductions for Businesses and the Self-Employed
Self-employed individuals and businesses can reduce taxable profits by claiming allowable expenses such as:
- Office costs – Rent, phone, and internet bills.
- Travel expenses – Fuel, public transport.
- Marketing and advertising – Website costs, social media ads.
- Staff wages – Salaries paid to employees.
Example: How Tax Deductions Work
If a business earns £80,000 and has £30,000 in allowable expenses, they only pay tax on £50,000 profit instead of the full income.
How to Reduce Your Tax Bill Legally and Avoid Common Tax Mistakes
How to Legally Reduce Your Tax Bill
Tax planning is essential to ensure you’re not overpaying tax unnecessarily. Here are some legal strategies to reduce your tax liability in the UK for 2025-2026.
1. Maximise Your Pension Contributions
Pension contributions receive generous tax relief. The government adds 20% for basic-rate taxpayers, and higher-rate taxpayers can claim back another 20% or 25% through their tax return.
Example:
- Emma, a higher-rate taxpayer, contributes £8,000 to her pension.
- The government adds £2,000 (basic tax relief).
- Emma also claims £2,000 via Self-Assessment, making her effective contribution only £6,000.
Key Tip: Use your full £60,000 annual pension allowance if possible to cut your tax bill.
2. Use the Marriage Allowance or Married Couple’s Allowance
- If one spouse earns below £12,570, they can transfer £1,260 of their allowance, saving up to £252.
- For couples where one partner was born before 6 April 1935, Married Couple’s Allowance can reduce tax by up to £1,260.
3. Make Use of ISAs (Individual Savings Accounts)
- Cash ISAs and Stocks & Shares ISAs allow tax-free savings and investments.
- The ISA allowance remains at £20,000 per year in 2025-2026.
Example:
If Liam earns £500 interest in a savings account outside an ISA, he could be taxed. But if the savings are inside an ISA, the interest is completely tax-free.
4. Claim Work-Related Tax Reliefs
If you work from home, use a personal car for business, or buy job-related equipment, you can claim tax relief.
Example:
- Sarah, an engineer, spends £1,200 on professional body memberships.
- She claims this expense, reducing her taxable income by £1,200, lowering her tax bill.
5. Split Income to Stay in Lower Tax Brackets
If you own a business or have investments, distribute income to a spouse in a lower tax bracket.
Example:
- Mark is a higher-rate taxpayer earning £60,000.
- His wife earns £10,000 (below the Personal Allowance).
- Instead of taking all dividends, Mark transfers shares to his wife, so she receives £5,000 tax-free dividends under her allowance.
6. Reduce Capital Gains Tax (CGT) Liability
- Each person has a CGT-free allowance of £3,000.
- Spouses can transfer assets tax-free, effectively doubling this to £6,000 per couple.
- Selling assets gradually over multiple tax years helps stay within tax-free limits.
Common Tax Mistakes to Avoid
❌ Missing Deadlines – Late Self-Assessment filing triggers automatic fines.
❌ Forgetting to Declare Extra Income – HMRC’s digital tools track PayPal, Airbnb, and freelance earnings. Always report side hustle income.
❌ Not Keeping Records – Without receipts, HMRC may disallow expenses claimed by self-employed individuals.
❌ Ignoring Payments on Account – If your tax bill exceeds £1,000, HMRC expects two advance payments for the next tax year (due 31 January and 31 July).
❌ Overlooking Allowances – Many people forget they can claim Marriage Allowance, pension relief, or home-office deductions.
Final Note: Expected Changes After Spring 2025 Budget
⚠️ Important: The tax rates, allowances, and figures mentioned in this article are based on current UK government policies and official updates until February 2025. However, the Spring 2025 Budget may introduce changes affecting the 2025-2026 tax year.
Before making any major financial decisions, always check the latest tax rates and allowances on GOV.UK to ensure you have the most up-to-date information.
FAQs
Q1: Will the UK income tax brackets change after the Spring 2025 Budget?
A: There is a possibility that the UK government may update tax brackets, allowances, or tax rates in the Spring 2025 Budget. Taxpayers should check official sources like GOV.UK for confirmed changes before the new tax year starts on 6 April 2025.
Q2: How do income tax rates differ between England, Scotland, Wales, and Northern Ireland?
A: While England, Wales, and Northern Ireland share the same tax bands and rates, Scotland has a different system with five tax bands instead of three. Wales has the power to set its own income tax rates, but for 2025-2026, it has chosen to match England and Northern Ireland.
Q3: What is the tax rate for those earning between £100,000 and £125,140?
A: People earning between £100,000 and £125,140 face a 60% effective tax rate due to the gradual loss of their Personal Allowance (£1 lost for every £2 earned over £100,000), in addition to the standard 40% higher rate tax.
Q4: How is tax calculated on multiple income sources, such as a job and rental income?
A: All taxable income is combined to determine which tax bands apply. For example, if you earn £40,000 from employment and £15,000 from rental income, your total taxable income is £55,000, meaning part of your rental income is taxed at 40% (higher rate).
Q5: Are state pensions and private pensions taxed differently in 2025-2026?
A: Both state pensions and private pensions are taxable income. However, they benefit from the Personal Allowance (£12,570 tax-free). Any pension income above this threshold is taxed at normal income tax rates.
Q6: If you earn below the Personal Allowance (£12,570), do you need to file a tax return?
A: Generally, no. If all your income is below £12,570 and taxed correctly via PAYE, you do not need to file a tax return. However, if you have untaxed income (e.g., rental or freelance earnings), HMRC may require a Self-Assessment.
Q7: What is the impact of inflation on UK income tax bands for 2025-2026?
A: The UK government has frozen income tax bands until at least April 2026, meaning rising wages could push more people into higher tax brackets (known as “fiscal drag”). This results in higher tax payments even if real income does not increase significantly.
Q8: Can you change your tax code if you think it’s incorrect?
A: Yes. If your tax code is wrong (e.g., due to changes in income, benefits, or allowances), you can contact HMRC or update it via your Personal Tax Account.
Q9: How does student loan repayment affect income tax for 2025-2026?
A: Student loan repayments are deducted through PAYE for employees and calculated through Self-Assessment for the self-employed. The thresholds and repayment rates vary by loan plan. For example, Plan 2 loans require 9% repayment on earnings over £27,295.
Q10: What happens if you move to Scotland during the tax year—how is tax calculated?
A: If you move to Scotland partway through the tax year, HMRC may apply Scottish tax bands to your entire annual income. You must inform HMRC immediately so they can adjust your tax code accordingly.
Q11: Do non-residents pay UK income tax on UK earnings?
A: Yes, non-UK residents must pay tax on UK-sourced income, such as employment, rental income, or UK-based investments. However, tax treaties may allow for double taxation relief in their home country.
Q12: Are redundancy payments taxable in 2025-2026?
A: The first £30,000 of redundancy pay is tax-free. Any redundancy amount above £30,000 is subject to income tax but not National Insurance.
Q13: How is tax handled if you work two jobs in the UK?
A: Your Personal Allowance (£12,570) is usually applied to one job, while the second job is taxed at basic rate (20%) or higher rate (40%/45%) depending on your total income. HMRC assigns a tax code (e.g., BR or D0) for your second job.
Q14: Can landlords deduct mortgage interest from rental income in 2025-2026?
A: No, landlords can no longer deduct mortgage interest directly. Instead, they receive a 20% tax credit on mortgage interest payments, which reduces their tax bill rather than taxable income.
Q15: How do you report foreign income for UK tax purposes?
A: If you are a UK tax resident, you must declare worldwide income, including foreign wages, property rental income, and dividends. You can claim foreign tax credits if you’ve already paid tax abroad.
Q16: How are company directors taxed on salary and dividends?
A: Directors are taxed on salary through PAYE and on dividends above £500 at:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
Q17: If you overpay tax, how long does it take to get a refund from HMRC?
A: HMRC usually processes tax refunds within 8-12 weeks after you submit a claim. You can check and apply for refunds online through your Personal Tax Account.
Q18: Are one-off bonuses taxed differently from regular salary?
A: No, bonuses are taxed as part of your normal income via PAYE, potentially pushing you into a higher tax bracket. If you receive a large bonus, more tax may be deducted initially, but you may reclaim overpaid tax later.
Q19: What happens if you don’t pay your tax bill on time?
A: If you miss the deadline (31 January for Self-Assessment payments), HMRC applies:
- 5% penalty after 30 days
- Another 5% after 6 months
- Additional daily interest on unpaid tax
Q20: Will UK income tax rates increase after 2025-2026?
A: As of February 2025, the UK government has not announced income tax rate increases beyond April 2026. However, future budgets may adjust tax rates, especially after the General Election expected in 2025.
Disclaimer:
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, Total Tax Accountants makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, Total Tax Accountants cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
