Complete Guide to UK Tax 2025/26

UK Income Tax (2025/26 Rates)

Income Tax is the primary tax on your earnings, collected by HMRC. Most employees pay through PAYE (Pay As You Earn), where your employer deducts tax before paying you. Self-employed individuals pay through Self Assessment.

Personal Allowance

The Personal Allowance is the amount you can earn tax-free each year. For 2025/26, it remains at £12,570. This threshold has been frozen since 2021 and will remain so until at least 2028, meaning more people are pulled into higher tax brackets as wages rise (known as "fiscal drag").

Important: If you earn over £100,000, your Personal Allowance reduces by £1 for every £2 you earn above this threshold. At £125,140, you lose the entire allowance. This creates the infamous "60% tax trap" where your effective marginal rate reaches 60% (plus 2% NI). See our £100k salary breakdown for details.

2025/26 Tax Bands (England, Wales & Northern Ireland)

Scottish Income Tax Rates 2025/26

Scotland has its own income tax bands, set by the Scottish Parliament. Scottish taxpayers generally pay more tax than those in the rest of the UK at the same income levels.

Your tax code determines how much tax-free income you're entitled to. The standard code 1257L reflects the £12,570 Personal Allowance. If you're on an emergency tax code like BR, 0T, or W1/M1, you may be paying too much tax. Use our Tax Code Calculator to check.

National Insurance (2025/26)

National Insurance (NI) contributions fund the State Pension, NHS, and other benefits. Unlike income tax, NI has different classes depending on your employment status, and employer contributions are separate from employee contributions.

Class 1 NI (Employees)

Key point: Employee NI drops to 2% above £50,270, but employer NI continues at 13.8% with no upper limit. This is why the true cost of employing someone is significantly higher than their salary - use our Employer Cost Calculator to see the full picture. Learn more about employer National Insurance.

Class 2 & 4 NI (Self-Employed)

Self-employed individuals pay:

• Class 2: £3.45 per week (if profits over £12,570)
• Class 4: 6% on profits between £12,570 and £50,270, then 2% above

Self-employed NI rates are lower than employee rates, but you don't get employer pension contributions or other employment benefits.

Pensions & Tax Relief

Pension contributions are one of the most powerful tax-saving tools available. You receive tax relief at your marginal rate, and salary sacrifice pensions also save National Insurance.

Pension Tax Relief

When you contribute to a pension, you get tax relief at your marginal rate:

• Basic Rate (20%): A £100 contribution costs you £80 (relief added automatically)
• Higher Rate (40%): A £100 contribution costs you £60 (claim extra via Self Assessment)
• Additional Rate (45%): A £100 contribution costs you £55

Salary Sacrifice Pensions

Salary sacrifice is even more tax-efficient because you also save National Insurance. Instead of paying pension contributions from your net salary, you agree to a lower salary with your employer contributing the difference to your pension.

Annual Allowance & Limits

• Annual Allowance: £60,000 (or 100% of earnings if lower)
• Tapered Annual Allowance: Reduces for those earning £260,000+ (adjusted income)
• Lifetime Allowance: Abolished from April 2024
• Carry Forward: Unused allowance from the previous 3 years can be used

Auto-Enrolment

By law, employers must automatically enrol eligible workers into a workplace pension. Minimum contributions are 8% of qualifying earnings (5% employee, 3% employer). You can opt out, but you'll lose the employer contribution - essentially free money. See our complete pensions guide for more details.

Student Loan Repayments (2025/26)

Student loan repayments are based on your income, not your loan balance. Once you earn above your plan's threshold, 9% (or 6% for Postgraduate) is automatically deducted through PAYE. Read our complete student loan repayment guide for a deeper understanding.

2025/26 Repayment Thresholds

When Loans Are Written Off

Understanding when your student loan is written off is crucial for financial planning:

• Plan 1: 25 years after April following graduation, or age 65
• Plan 2: 30 years after April following graduation
• Plan 4: 30 years after April following graduation, or age 65
• Plan 5: 40 years after April following graduation
• Postgraduate: 30 years after April following graduation

Dividend Tax (2025/26)

Dividends are taxed differently from salary. They don't incur National Insurance, making them tax-efficient for company directors and shareholders. However, the dividend allowance has been significantly reduced in recent years.

Dividend Allowance & Rates

• Dividend Allowance: £500 (down from £1,000 in 2024/25, £2,000 in 2022/23)
• Basic Rate: 8.75%
• Higher Rate: 33.75%
• Additional Rate: 39.35%

Dividends use up your tax bands after salary. If your salary uses the Basic Rate band, dividends will be taxed at Higher Rate. The optimal salary/dividend split for a company director typically involves taking a salary up to the NI threshold (£12,570) and the rest as dividends.

Benefits & Entitlements

Understanding how benefits interact with tax and work is essential. Universal Credit, Child Benefit, and other entitlements have complex rules that can significantly affect your finances.

Universal Credit

Universal Credit replaces six legacy benefits (Jobseeker's Allowance, Housing Benefit, Working Tax Credit, Child Tax Credit, Employment and Support Allowance, Income Support). Key 2025/26 figures:

• Standard Allowance (single under 25): £311.68/month
• Standard Allowance (single 25+): £393.45/month
• Couple (both under 25): £489.23/month
• Couple (one or both 25+): £617.60/month
• Work Allowance (with housing costs): £404/month
• Taper Rate: 55%

The 55% taper means for every £1 earned above your work allowance, UC reduces by 55p. Combined with income tax (20%) and NI (8%), this can create effective marginal rates over 70% for UC claimants.

Child Benefit & HICBC

Child Benefit for 2025/26:

• First child: £25.60/week (£1,331/year)
• Each additional child: £16.95/week (£881/year)

The High-Income Child Benefit Charge (HICBC) affects families where one parent earns over £60,000. You repay 1% of the benefit for every £200 earned above £60,000. At £80,000, you repay 100%. Consider pension contributions to reduce adjusted net income below £60,000 - see our Pension Contribution Calculator to explore this strategy.

Contractor Taxes & IR35

Contractors working through a limited company face unique tax considerations. The key question is whether you're inside or outside IR35 - the legislation determining if you're truly self-employed or a "disguised employee." Read our self-employment tax guide for broader context.

Outside IR35

If your contract is outside IR35, you can take a tax-efficient mix of salary and dividends. See our Dividend Tax Calculator to optimise your extraction strategy:

• Take salary up to £12,570 (tax-free, minimal NI)
• Take remaining profits as dividends (8.75% - 39.35%)
• No employer NI on dividends
• Corporation Tax at 25% (or 19% if profits under £50k)

Inside IR35

If you're inside IR35, your income is taxed like employment:

• Full PAYE income tax
• Employee NI at 8%/2%
• Employer NI at 13.8% (reduces your take-home)
• 5% allowance for expenses (if paid via agency)

Take-Home Comparison

A contractor earning £500/day (roughly £110k/year) might take home:

• Outside IR35: ~£85,000+ per year
• Inside IR35: ~£65,000 per year
• Permanent employee: ~£68,000 per year (but with benefits)

Allowances & Tax Reliefs (2025/26)

The UK tax system includes numerous allowances that can reduce your tax bill. Here's a comprehensive list of what's available:

Real Examples & Scenarios

Example 1: £30,000 Salary

Example 2: £50,000 Salary (Near Higher Rate)

Example 3: £60,000 Salary (Higher Rate)

Example 4: £100,000 Salary (60% Tax Trap Zone)

Example 5: £5,000 Bonus on £45,000 Salary