This page explains the basic concepts of income tax in the UK. Specific tax bands relate to England, Wales and Northern Ireland. Scotland has its own income tax bands, but the concepts are the same.
Contents
Marginal Tax
The UK operates what is known as a marginal tax system. Put simply, for every £1 you earn over a threshold, you only pay that tax rate on that income, not the whole lot.
A common misunderstanding here is once you reach the 40% tax bracket you pay 40% on all your income and are therefore worse off. But instead you only pay 40% on anything within the 40% tax bracket.
An easy way to think about this is with an analogy. Imagine you have four buckets, and your tax is worked out by the amount of water (income) in each bucket:
- 🪣 Personal allowance bucket. This isn’t very big, but water in this bucket isn’t taxed, and once it is full, water overflows into the…
- 🪣 Basic rate bucket. This bucket is bigger, and only water in this bucket is taxed at the basic rate. It doesn’t affect the first bucket. Once this bucket is full the water overflows into the…
- 🪣 Higher rate bucket. This is a larger bucket still and water here attracts higher-rate tax. Almost everybody has run out of water before this bucket is filled.
- 🪣 Additional rate bucket. This bucket is unlimited in size, and only very few people will find themselves using it.
The point of this analogy is that the extra water poured in will not affect the water in any of the previous buckets – you’ve already filled those.
Tax rates, codes and allowances
The current rates for income tax in England, Wales and Northern Ireland, can be found on the Government website here. There are different rates if you live in Scotland.
What’s my personal allowance?
Put simply, your personal allowance is the amount you can earn without paying tax. This is determined by HMRC and is reflected in your tax code. This is given to your employer so they can deduct the correct amount of tax each month from your pay. (This assumes PAYE, but most people are. Generally you’ll know if you’re not.)
The “default” tax code for 2023/24 is 1257L, which gives you an allowance of £12,570 before you start paying income tax. This resets at the start of every tax year which runs 6th April to 5th April the following year.
Some people have different tax codes which allow them to earn more, or less, each year without paying tax. If HMRC change your code, they’ll send you a letter explaining why. For example, a code of 850L would mean your personal allowance had been reduced to £8,500.
Worked example
Salary: £60,000
Assuming a 1257L tax code, you pay no tax on the first £12,570 and “some” tax on the remaining £47,430. At the time of writing, the 40% tax rate comes in at £50,270. (Current rates can be found here). This example ignores National Insurance Contributions which are usually deducted in addition to income tax (see section below for more info).
| Income tax rate | Income tax amount | |
| First £12,570 | 0% | £0 |
| Next £37,700 | 20% | £7,540 |
| Next £9,730 | 40% | £3,892 |
| Total: £60,000 | 19.05% | £11,432 |
In this example, personal allowance and basic rate buckets are full, but there is lots of space left in the higher-rate bucket.
If a bonus of £10,000 was earned, this extra would be taxed at 40% (£4,000). It would bring the total tax paid to £15,432, or 22% of the £70,000 earned that year.
I’ve found another page on HMRC with different numbers for income tax bands?
Was it this page? It causes a lot of confusion. It is intended for employers, and reflects the rates to be applied to your income after your personal allowance.
Please use https://www.gov.uk/income-tax-rates instead!
My tax code is 1257L and I’ve been charged tax already, but I’ve not earnt over £12,570?
The standard tax code is what is called a cumulative tax code. This means you get 1/12th of you personal allowance each month (£1,047.50) before you start paying tax. This is so the tax deducted over the course of a year remains broadly consistent, rather than giving some months at the start with no tax, and then months towards the end with big deductions.
If you start work part way through a year, you’ll get previous month’s allowances credited against your first payslip, and these will roll over until you’re all caught up. This can result in paying very little tax for the first few months.
I have a different tax code, what does it mean?
HMRC have a very comprehensive guide on what all the different letters mean in your tax code here.
The one that comes up the most are M1 and W1 at the end, which are “month 1” and “week 1” codes. In short, each month/week is taken in isolation, rather than averaging over the year like with a cumulative code. If you have one of these codes, you should contact HMRC via phone or web-chat, or login to your Personal Tax Account (see below) to provide them with more information.
The other codes to be aware of are the “emergency codes” – BR for basic-rate and D for higher-rate. These apply a flat rate of tax with no allowance given, and are often used for second jobs where HMRC have set your full personal allowance against your first job, but can also be applied incorrectly if HMRC aren’t provided with a P45 or P46 at the start of a new job.
HMRC have said I underpaid tax last year by £500, but they’ve taken £2,500 off my allowance?
Another one that catches people out is when HMRC adjust your code and it looks like they’re taking much more off you than you owe.
Remember, your tax code determines how much income you pay tax on (or rather don’t pay tax on). By reducing your allowance by £2,500, that’s the extra income that will be subject to tax. For a basic rate payer, 20% of £2,500 means you’ll pay £500 more in tax.
I’ve had a bonus this month why have I paid more tax than I should have?
The system for PAYE assumes that the pay you have in one month, will be replicated over the remaining year. If you have one month with an unusually large pay (e.g. from a bonus) then this can result in you overpaying tax in that month, as the assumption is made that this payment is your new salary.
This usually resolves itself over the rest of the tax year through paying a reduced amount of tax each month, until you’re caught back up, and there’s nothing further you need to do. In some cases though, this may not be resolved fully before the end of the tax year. HMRC will automatically refund the payment after the end of the tax year in around July or August, but if you don’t get a refund or need it back sooner, it’s usually only a quick phone call to get it refunded.
I receive “benefits in kind” at work. How are they taxed?
You may have joined a workplace Private Medical Insurance (PMI) scheme, or receive other perks on top of your salary. Whilst your employer may cover the costs of these, HMRC consider it to be a form of income, and will apply income tax to the amount. This is usually done via a P11d notice, received in June or July the following tax year, and adjustments are usually made to your tax code to cover it.
Let’s say the cost of your membership in a PMI scheme is £100 / month to your employer – HMRC add that to your salary, and tax the “benefit in kind”. They assume you have £1,200 additional income. If you are a basic-rate taxpayer, this will result in £240 more tax for the year, and £480 more if you’re a higher-rate taxpayer.
This assumed additional income also impacts your ‘Net Adjusted Income’, which can have an effect on entitlement to Child Benefit and reduction of tax allowances for high-earners.
Not all workplace benefits are taxable. You can find information on this on gov.uk. One of the most common workplace benefits that is not taxable is “group death-in-service” schemes – life insurance provided by your employer, usually based on a multiple of your salary. Confusingly, this isn’t mentioned on the linked gov.uk information page.
I have stopped work and wont have any more income this year, can I get a refund quicker?
If you stop working part way through a year, it’s likely that you’ll have overpaid tax on this income. You can contact HMRC and inform them that you wont have any further taxable income this year, and they’ll issue a refund for any overpaid taxes.
What about “tax traps” that I have heard about?
There are some levels of earnings where disproportionately high amounts of tax are paid due to the removal of allowances. The two notable ones are:
- The loss of child benefit on earnings between £50,000 and £60,000. If you have children and earn this much, the effective tax-rate on this bucket can be significantly higher than 40%, typically 70%+.
- The loss of the personal allowance on earnings between £100,000 and £125,140. The effective tax rate on this bucket is 60%.
We go into more detail about tax traps in our Tax efficiency for high earners page.
Do I need to complete a Self Assessment Tax Return?
Most employees with straightforward tax affairs do not need to complete a tax return. As we mention in our Savings Accounts page, if your taxable savings income exceeds £10,000 you will need to.
Other times that you may need to are detailed on this gov.uk help page.
How can I work out what my take home pay should be?
If you are looking at changing jobs, or have recently been promoted, you may want to estimate what your take-home pay should be. There are lots of net pay calculators online but the two that get most recommendations from the subreddit are Listen to Taxman and The Salary Calculator.
These calculators are only as accurate as the information provided – this means entering the correct tax code, accurate pension contributions, and so on.
Personal Tax Account
A lot of tasks related to the tax you pay, such as updating your predicted income for the year, or reclaiming overpaid tax if you leave employment can be managed through your personal tax account.
The HMRC personal tax account page can be accessed here: https://www.gov.uk/personal-tax-account.
If you’ve not used the account before, you’ll need to register. This does require some personal information, so make sure you have you ID and a recent payslip to hand when you register.
National Insurance
National Insurance contributions are often seen as another tax on your income, but they work in a slightly different way to Income Tax. The rates are the same for the whole of the UK, including Scotland.
People earning through the Pay As You Earn (PAYE) system will be subject to Class 1 National Insurance contributions, and most will pay Category A contributions. The HMRC page has the full table for those with different letters (you’ll find which category you are on a payslip) but for Class A (the vast majority of employees):
| Weekly Income Band | Monthly Income band | National Insurance Rate |
| £0 – £242 | £0 – £1,048 | 0% |
| £242 – 967 | £1,048 – £4,189 | 10% |
| £967 and above | £4,189 and above | 2% |
When multiplied out, these thresholds work out the same as the standard income tax thresholds in England, however unlike income tax, National Insurance is calculated per pay period. This means that if you earn more one month, you’ll pay more National Insurance, which you wont get back over the rest of the year.
Employees do not have to pay Class 1 National Insurance contributions before the age of 16 or once they reach state retirement age.
There are other classes of National Insurance. The self-employed pay Class 2 or Class 4, and you can choose to pay voluntary Class 3 contributions to maintain a state pension record if you do not earn enough otherwise. You can find more details on gov.uk.
Tax on Savings and Investments
We go into lots of detail about tax on cash savings on the Savings Accounts page.
You may also receive interest or dividends from stocks and shares that you own. If these are owned outside of ISAs or Pensions, they are taxed as income.
The important thing to remember in relation to overall taxation, is that savings and investment income is always added to the buckets last, after any earned income, and so always attracts the highest marginal rate of tax.