How income tax actually works

Bands, allowances, National Insurance, and why your marginal rate is rarely the rate you think.

Most people know roughly what tax band they're in and very little else about how their income is taxed. That's usually fine — PAYE handles it. But a handful of details decide whether perfectly ordinary decisions cost you money, and they're worth twenty minutes.

The bands

In England, Wales and Northern Ireland for 2026/27:

Personal Allowance — the first £12,570 is tax-free

Basic rate, 20% — on income from £12,571 to £50,270

Higher rate, 40% — from £50,271 to £125,140

Additional rate, 45% — above £125,140

Scotland sets its own income tax rates on earned income, with more bands and different thresholds, generally meaning higher tax for middle and upper earners and slightly lower for the lowest. If you live in Scotland, the Scottish rates apply to your earnings regardless of where your employer is based. The Income Tax Calculator handles both.

The bit people get wrong

Moving into a higher band does not tax all your income at the higher rate. It taxes the part above the threshold.

Someone earning £52,000 pays 40% on £1,730 of it — about £692 — not 40% on £52,000. A pay rise that crosses a threshold always leaves you better off, despite the persistent belief otherwise.

The rate that matters for decisions isn't your average rate, it's your marginal rate: what you'd pay on the next pound, or save on the last one. That's the figure to use when working out what a pension contribution or a bit of extra work is really worth.

Where marginal rates go strange

Your marginal rate isn't always the band you're in. Two points in the income scale produce effective rates far above the headline:

Between £100,000 and £125,140, the Personal Allowance tapers away and the effective rate hits 60%. This catches a lot of people and is worth understanding properly — see The 60% tax trap.

Between £60,000 and £80,000 for parents claiming Child Benefit, the High Income Child Benefit Charge claws it back, producing effective rates that rise with the number of children. See The High Income Child Benefit Charge.

National Insurance

A second tax on earned income, with its own thresholds and no relationship to your Personal Allowance.

Employees pay 8% on earnings between roughly £12,570 and £50,270, then 2% above that. Employers pay 15% on top, which you never see on a payslip but which is very much part of your cost.

Two features worth knowing. It applies to earned income only — not pensions, rent, dividends and savings interest. And the rate falls above the upper threshold, which is why the combined income tax and NI marginal rate is 32% for a basic-rate employee and 42% for a higher-rate one, rather than the 20 and 40 you'd expect.

Marriage Allowance

If one of you earns below the Personal Allowance and the other is a basic-rate taxpayer, the lower earner can transfer £1,260 of allowance to the higher earner, worth £252 a year.

It's straightforward, it can be backdated up to four years, and it's widely unclaimed. It doesn't work if the higher earner pays 40%.

How the tax actually gets collected

PAYE deducts tax as you're paid, based on your tax code. It generally gets it right for a single straightforward job, and generally gets it wrong when you have multiple sources of income, a change mid-year, or a large one-off payment.

Self Assessment is a return you file yourself, required if you're self-employed, have significant untaxed income, or fall into various other categories including earning above certain thresholds.

Two practical points. Your tax code is worth checking — errors are common and they persist quietly for years. And if you're a higher-rate taxpayer contributing to a personal pension, you probably have relief to claim that isn't reaching you automatically, covered in Annual Allowance and tax relief.

What to take from this

Know your marginal rate rather than your band. Check your tax code. Claim Marriage Allowance if it applies. And if your income is near £100,000 or near £60,000 with children, read the two pages linked above — those are where the real money is.

This article is for general education only and isn't personal advice. Figures are for 2026/27.