Tax in the UK is calculated by adding together taxable income, deducting available allowances and applying the relevant tax rate to each portion of income.
For most people, the first £12,570 is covered by the Personal Allowance. Income above this amount is taxed progressively, meaning only the portion within each tax band is charged at that band’s rate.
Employees usually pay automatically through PAYE, while self-employed people report their profits through Self Assessment. Scotland has different Income Tax bands for earnings, pensions and property income.
The figures below apply to the 2026/27 tax year, which runs from 6 April 2026 to 5 April 2027.
What Income Is Taxed in the UK?
Income Tax may be charged on money received from several sources, including:
- Employment and bonuses
- Self-employment profits
- Workplace and private pensions
- Rental property
- Savings interest
- Company dividends
- Certain state benefits
- Foreign income where UK tax applies
Not every payment is taxable. Some benefits are tax-free, while certain income can be covered by allowances. A person may also receive income from an ISA without paying Income Tax or Capital Gains Tax on investments held inside it.
People who are unsure whether their earnings have reached the taxable level can check when they start paying UK tax.
How Is Income Tax Calculated Step by Step?
A basic UK Income Tax calculation follows these stages:
- Add together income from all taxable sources.
- Deduct qualifying expenses and relevant tax reliefs.
- Calculate adjusted net income.
- Deduct the available Personal Allowance.
- Separate non-savings, savings and dividend income.
- Apply the correct rate to each tax band.
- Deduct tax already collected through PAYE or other arrangements.
- Pay any outstanding balance or claim a refund if too much tax was deducted.
Income is not normally taxed at one single rate. Different portions of the same income can fall into different bands.
For example, someone earning £60,000 does not pay 40% tax on the entire £60,000. The Personal Allowance is tax-free, the basic-rate portion is taxed at 20%, and only the remaining amount is taxed at 40%.
What Are the UK Income Tax Bands for 2026/27?
The following rates apply to most employment, pension, self-employment and rental income in England, Wales and Northern Ireland.
| Income band | Total annual income with standard allowance | 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% |
These figures assume the person receives the full standard Personal Allowance. Someone earning more than £100,000 may receive a reduced allowance.
The thresholds describe where each part of the income falls. Moving into the higher-rate band does not cause all previous income to be taxed at 40%.
How Much Tax Would Someone Earning £60,000 Pay?
An employee in England, Wales or Northern Ireland earning £60,000 and receiving the standard Personal Allowance would have the following Income Tax calculation:
| Calculation | Amount |
| Gross annual income | £60,000 |
| Personal Allowance | £12,570 |
| Taxable income | £47,430 |
| 20% tax on £37,700 | £7,540 |
| 40% tax on £9,730 | £3,892 |
| Total Income Tax | £11,432 |
The estimated Income Tax bill is therefore £11,432 for the year. This calculation does not include National Insurance, pension contributions, student loan repayments or other payroll deductions.
Why Is the Personal Allowance Reduced Above £100,000?
The standard Personal Allowance is £12,570, but it is reduced when adjusted net income exceeds £100,000.
The allowance decreases by £1 for every £2 of adjusted net income above £100,000. For example, someone with adjusted net income of £110,000 loses £5,000 of their allowance:
- Income above £100,000: £10,000
- Allowance reduction: £5,000
- Remaining Personal Allowance: £7,570
The Personal Allowance is completely removed when adjusted net income reaches £125,140.
This reduction creates an effective 60% Income Tax rate on part of the income between £100,000 and £125,140 in England, Wales and Northern Ireland. The taxpayer pays 40% higher-rate tax while also losing £1 of tax-free allowance for every additional £2 earned.
Pension contributions and eligible charitable donations can sometimes reduce adjusted net income. Other overlooked UK tax reliefs may also affect the final calculation.
How Is Tax Calculated Through PAYE?
Employees normally pay Income Tax through Pay As You Earn, commonly known as PAYE. The employer uses the employee’s tax code to calculate the amount that should be deducted from each wage payment.
The standard tax code for many employees is 1257L. The number indicates a £12,570 Personal Allowance, while the letter provides information about the employee’s tax circumstances.
PAYE calculations may consider:
- Earnings during the current pay period
- Total earnings earlier in the tax year
- Tax already deducted
- The employee’s tax code
- Bonuses, commission and taxable benefits
- Adjustments sent to the employer by HMRC
A cumulative tax code looks at the employee’s position across the tax year. A Week 1 or Month 1 code treats each pay period separately, which can produce different deductions.
Employees can check wages through HMRC and compare the reported figures with their payslips. Anyone placed on an unfamiliar emergency code should understand how a code such as 0T W1 affects pay.
Is National Insurance Included in Income Tax?
National Insurance is separate from Income Tax, even though both may be deducted from the same payslip.
For a typical Category A employee in 2026/27, employee National Insurance is generally charged at:
| Annual earnings | Employee National Insurance rate |
| Up to £12,570 | 0% |
| £12,571 to £50,270 | 8% |
| Above £50,270 | 2% |
National Insurance is calculated for each pay period, so an exact annual figure may differ slightly from a simple yearly estimate. Employers may also have to pay employer National Insurance, but this does not usually appear as a deduction from the employee’s gross salary.
How Is Tax Calculated for Self-Employed People?
A sole trader pays Income Tax on taxable business profit rather than total sales.
Taxable profit is broadly calculated as:
Business income − allowable expenses − relevant capital allowances = taxable profit
Suppose a sole trader receives £60,000 from customers and has £15,000 of allowable business expenses:
| Calculation | Amount |
| Business turnover | £60,000 |
| Allowable expenses | £15,000 |
| Taxable profit before personal allowance | £45,000 |
| Personal Allowance | £12,570 |
| Income subject to basic-rate tax | £32,430 |
| Estimated Income Tax at 20% | £6,486 |
The person may also have Class 4 National Insurance to pay. For 2026/27, this is generally charged at 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270.
Self-employed people normally report their income and expenses through Self Assessment. They may need to apply for a UTR before submitting a return.
Accurate small-business bookkeeping records are important because missing expenses can increase taxable profit, while claiming non-business costs can result in an incorrect return.
What Happens When Someone Is Employed and Self-Employed?
A person can be employed and self-employed together. Their salary and taxable business profit are combined when calculating the applicable Income Tax bands.
For example, consider someone who receives:
- £35,000 from employment
- £20,000 of taxable self-employment profit
- £55,000 of total income
The Personal Allowance may already be used against the employment income. Part of the self-employment profit could therefore fall into the higher-rate band.
Tax deducted from the salary through PAYE is credited against the total liability. Any remaining Income Tax and self-employed National Insurance are normally collected through Self Assessment.
How Are Payments on Account Calculated?
Some Self Assessment taxpayers must make payments on account towards their next tax bill. Each payment is usually half of the previous year’s qualifying Self Assessment liability.
The normal payment dates are:
- 31 January during the tax year
- 31 July following the end of the tax year
A balancing payment may also be required on 31 January if the two advance payments do not cover the final liability.
Payments on account do not increase the actual tax charged. They bring forward part of the payment for the following year. However, they can make a first Self Assessment bill appear unexpectedly large.
People preparing a return can review the process for small-business tax returns. Sole traders and landlords should also consider whether the latest Making Tax Digital rules apply to them.
How Is Income Tax Calculated in Scotland?
Scottish taxpayers have different rates and bands for employment income, pensions, self-employment profits and most rental income.
The 2026/27 Scottish bands are:
| Scottish Income Tax band | Total annual income with standard allowance | Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Starter rate | £12,571 to £16,537 | 19% |
| Basic rate | £16,538 to £29,526 | 20% |
| Intermediate rate | £29,527 to £43,662 | 21% |
| Higher rate | £43,663 to £75,000 | 42% |
| Advanced rate | £75,001 to £125,140 | 45% |
| Top rate | Over £125,140 | 48% |
The Personal Allowance taper still applies when adjusted net income exceeds £100,000.
Scottish rates do not apply to savings interest or dividend income. Those types of income are taxed using UK-wide rules.
How Are Savings and Dividends Taxed?
Savings and dividends have separate allowances and rates. They still use space within the taxpayer’s wider Income Tax bands.
Savings interest
The Personal Savings Allowance for 2026/27 is generally:
| Taxpayer’s band | Personal Savings Allowance |
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Some people with low non-savings income may also qualify for a starting rate for savings of up to £5,000. This starting-rate band is gradually reduced as other income rises above the Personal Allowance.
Dividend income
The dividend allowance is £500 for 2026/27. Dividend income above the allowance is generally taxed at:
| Income Tax band | Dividend tax rate |
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Dividends are normally placed on top of other taxable income when the tax bands are calculated. This means a person’s salary or business profit can push part of their dividend income into a higher band.
How Is Tax Calculated for a Limited Company?
A limited company is legally separate from its owners. It pays Corporation Tax on taxable company profits rather than personal Income Tax.
Taxable company profit can include:
- Trading profits
- Investment income
- Chargeable gains from selling assets
- Other taxable company income
Allowable business expenses, capital allowances, losses and qualifying reliefs can reduce taxable profit.
The main Corporation Tax rates are:
| Taxable company profit | Corporation Tax treatment |
| £50,000 or less | 19% small-profits rate |
| Between £50,000 and £250,000 | 25% less Marginal Relief |
| More than £250,000 | 25% main rate |
The £50,000 and £250,000 thresholds may be reduced where a company has associated companies or a short accounting period.
Company owners can face additional personal tax when taking money as salary, dividends or benefits. More information is available in corporation tax explained.
How Are VAT and Capital Gains Tax Calculated?
Income Tax is only one part of the UK tax system.
| Tax | Basic calculation |
| VAT | VAT charged on sales minus recoverable VAT paid on purchases |
| Capital Gains Tax | Disposal proceeds minus eligible costs, losses and available allowance |
| Corporation Tax | Taxable company profit multiplied by the applicable rate |
| Inheritance Tax | Taxable estate value after exemptions, allowances and reliefs |
| Council Tax | Property valuation band and the local authority’s annual charge |
A business generally needs to register for VAT when its taxable turnover exceeds £90,000 over a rolling 12-month period or is expected to exceed the threshold within the relevant forward-looking period. Businesses below the threshold may register voluntarily. The steps involved are explained under how to become VAT registered.
Capital Gains Tax usually applies to taxable gains rather than the full amount received from selling an asset. Individuals have a £3,000 Annual Exempt Amount, subject to eligibility and the nature of the disposal. Most individual gains above the allowance are taxed at 18% or 24%, depending on how much of the basic-rate band remains available.
How Can Someone Check Whether Their Tax Is Correct?
A taxpayer should compare their:
- Gross pay or business income
- Tax code
- Taxable benefits
- Allowable expenses
- Pension contributions
- Savings and dividend income
- Tax already deducted
- Current Income Tax bands
Employees should review every payslip, particularly after starting a new job, receiving a bonus or changing benefits. Self-employed people should reconcile their bank transactions, invoices and receipts before submitting a return.
Professional support may be worthwhile where someone has several income sources, overseas earnings, capital gains, rental properties or a limited company. The likely cost can be considered alongside typical accountancy costs.
What Mistakes Commonly Cause an Incorrect Tax Calculation?
Common problems include:
- Using tax rates from the wrong tax year
- Applying one rate to the whole income
- Forgetting the Personal Allowance taper
- Ignoring income from savings or dividends
- Treating business turnover as taxable profit
- Claiming personal spending as a business expense
- Using an incorrect tax code
- Forgetting income from a second job
- Mixing company money with personal income
- Failing to include taxable employment benefits
Keeping records throughout the year makes it easier to identify errors before a return or payment deadline.
Conclusion
Tax in the UK is calculated by identifying total taxable income, deducting available allowances and applying different rates to each tax band.
Employment tax is generally collected through PAYE, while self-employed people calculate taxable profit and report it through Self Assessment. Savings, dividends, capital gains and limited-company profits follow separate rules.
The calculation becomes more complex where someone has multiple income sources, earns more than £100,000, lives in Scotland or operates through a limited company.
Reviewing tax codes, keeping accurate records and using the correct figures for the relevant tax year can prevent unexpected bills and overpayments.
Frequently Asked Questions
How Much Income Tax is Paid on a £50,000 Salary?
Assuming the full £12,570 Personal Allowance and no other taxable income, £37,430 would be taxed at 20%. The estimated annual Income Tax would be £7,486. National Insurance and other deductions would be calculated separately.
Is All Income Taxed at the Highest Applicable Rate?
No. UK Income Tax is progressive. Each portion of taxable income is charged at the rate for the band it falls within.
Is Tax Calculated Before or After Pension Contributions?
It depends on the pension arrangement. Some workplace contributions are taken before Income Tax, while relief-at-source schemes collect contributions from taxed pay and add basic-rate relief afterwards. Higher-rate taxpayers may need to claim additional relief.
Why Can the Tax Deduction Change After Receiving a Bonus?
A bonus increases taxable pay for that period and can push part of the income into a higher band. The result also depends on whether the tax code is cumulative or applied on a Week 1 or Month 1 basis.
How is Tax Calculated With Two Jobs?
Income from both jobs counts towards the person’s total taxable income. HMRC normally allocates the Personal Allowance through tax codes, often applying it to the main employment. The second job may use a BR, D0 or D1 code depending on the estimated total income.
Are Student Loan Deductions Part of Income Tax?
No. Student and postgraduate loan repayments are separate deductions. They are calculated using the borrower’s loan plan and earnings above the relevant repayment threshold.
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