How UK Income Tax Works

What Income Tax is charged on

Income Tax applies to most types of income, including wages from employment, profits from self-employment, most pensions and some savings and dividend income. Not all income is taxable, and different types of income can be taxed in different ways.

For a typical employee, Income Tax on wages is collected automatically through PAYE (Pay As You Earn), so the tax is deducted before the money reaches your bank account.

The Personal Allowance

Most people can earn a certain amount each tax year before paying any Income Tax at all. This tax-free amount is called the Personal Allowance.

The allowance is gradually reduced for very high earners: for every £2 of income above £100,000, £1 of Personal Allowance is lost, until it disappears entirely.

Tax bands and rates

Income above your Personal Allowance is taxed in bands. Each band has its own rate, and only the income that falls within a band is taxed at that band's rate.

• Basic rate — the first slice of taxable income, taxed at the lowest rate.
• Higher rate — income above the basic-rate limit.
• Additional rate — income above the higher-rate limit.

Because the bands are progressive, earning more never leaves you worse off overall — only the income within each higher band is taxed at the higher rate.

A worked example

Here is how the bands apply to a £30,000 salary, using the illustrative figures above.

National Insurance is worked out separately, so your take-home pay will be lower than gross salary minus Income Tax alone.

How it fits together

To estimate your Income Tax: start with your total income, subtract your Personal Allowance to find your taxable income, then apply each band's rate to the portion of income that falls within it. National Insurance is calculated separately.

The salary calculator does this for you and also shows National Insurance, pension and student-loan deductions alongside your take-home pay.