UK tax rates explained — the way nobody else explains them

Your personal allowance is the amount of income you can earn each year without paying any income tax on it. For 2025/26 it is £12,570.

Think of it as a tax-free buffer — HMRC lets you keep the first £12,570 of whatever you earn, no questions asked.

Important: the personal allowance tapers away above £100,000 — losing £1 for every £2 earned above that point. Above £125,140 it disappears entirely.

Marginal rate is the tax rate on your next £1 of income — the rate that applies to the highest slice of your earnings. If you earn £55,000, your marginal rate is 40% because your last £4,730 falls in the higher rate band.

Effective rate is the percentage of your total income that goes to tax — a blended average across all bands. Someone earning £55,000 has a marginal rate of 40% but an effective income tax rate of only around 19.5%.

Most people confuse these. When someone says "I pay 40% tax" they usually mean their marginal rate — but their effective rate is much lower.

Adjusted net income (ANI) is your total income minus certain deductions — primarily pension contributions and Gift Aid donations. It is the figure HMRC uses to assess whether you're in the personal allowance taper zone and whether you're subject to the High Income Child Benefit Charge.

ANI is not the same as your gross salary. Someone earning £105,000 who contributes £8,000/year to a pension has an ANI of £97,000 — below the £100,000 taper threshold.

Between £100,000 and £125,140, HMRC withdraws your personal allowance at the rate of £1 for every £2 you earn above £100,000. This is called the personal allowance taper.

Why does this create a 60% effective rate? Because each £2 you earn above £100,000 is taxed twice:

1. The £2 itself is taxed at 40% = 80p tax
2. You lose £1 of personal allowance, which was protecting £1 of income from 40% tax = 40p extra tax
Total: £1.20 tax on £2 earned = 60% effective rate

Your tax code tells your employer how much tax-free income you're entitled to in the current tax year. It appears on your payslip and your P60.

The most common code is 1257L — the "L" means standard personal allowance, and 1257 × 10 = £12,570. Other codes indicate adjustments — for benefits in kind, underpaid tax, multiple jobs, or restricted allowances.

You can check and query your tax code at gov.uk/personal-tax-account. Millions of people are on the wrong code — it's worth checking.

Employee NI is deducted from your pay: 8% on earnings between £12,570 and £50,270, then 2% above £50,270. It funds your State Pension entitlement and NHS access.

Employer NI is paid by your employer on top of your salary at 15% on earnings above £5,000. You never see it on your payslip — but it represents the true cost of employing you and affects pay rise decisions.

PAYE (Pay As You Earn) is the system UK employers use to collect income tax and National Insurance directly from your salary before it reaches you. Your employer calculates the tax due, deducts it, and pays it to HMRC on your behalf.

Most UK employees never interact directly with HMRC because PAYE handles their tax automatically. The exceptions are people who earn above £100,000, have untaxed income, or need to claim reliefs not handled through PAYE — these people need to file a Self Assessment tax return.

Self Assessment is the system for people who need to declare income or claim reliefs that PAYE cannot handle automatically. You file an annual tax return directly with HMRC.

You must file Self Assessment if you: earn above £100,000, have untaxed income above £1,000, receive rental income above £2,500, are self-employed with profits above £1,000, or have foreign income.

Filing deadline: 31 January (online) for the previous tax year. Payment of any tax owed also due 31 January.

Salary sacrifice: your employer reduces your gross salary by the pension amount before calculating tax and NI. You save both income tax AND National Insurance. Your employer also saves employer NI.

Relief at source: your full salary is paid to you, your pension provider claims 20% basic rate relief from HMRC automatically. Higher rate taxpayers must claim the additional 20% via Self Assessment — this is commonly missed.

Salary sacrifice saves more — it avoids NI as well as income tax. On a £10,000 pension contribution a higher rate taxpayer saves approximately £800 more with salary sacrifice than relief at source.