What is income tax?

Income tax is a tax on what you earn, including wages, self-employed profits, pensions, rent, and some savings and dividends. Outside Scotland in 2026/27, most people pay nothing on the first £12,570. They then pay 20%, 40% or 45% on income in higher bands.

Income tax is the UK's biggest single source of tax revenue. It works in bands, so each rate applies only to income within that band. In 2026/27 the personal allowance is £12,570. The basic rate of 20% applies up to £50,270. The higher rate of 40% applies up to £125,140. Above that, the additional rate is 45%.

Scotland sets its own rates and bands on earnings. In 2026/27 it has six bands, from a 19% starter rate up to a 48% top rate. Most employees pay through PAYE, where the employer deducts tax each payday. The self-employed and people with other income usually file a Self Assessment tax return.

Thresholds are frozen until April 2031. As wages rise, more people are pulled into paying tax and into higher bands. This is called fiscal drag. Income tax sits alongside National Insurance, which is a separate charge on earnings with its own thresholds and rates. Scottish taxpayers pay their own rates on wages and pensions but UK rates on savings and dividends. Income tax raises more money than any other tax, and its rates are among the most closely watched announcements in every Budget.

England, Wales and Northern Ireland rates. Scotland sets its own bands. Raises about £330bn a year, the biggest tax.

How it works

• Personal allowance: The amount you earn before paying any income tax. Raising it helps every taxpayer by the same cash amount but is very expensive.
• Higher rate threshold: Where the 40p rate starts (personal allowance plus the £37,700 basic rate band). Freezing it drags more teachers and nurses into the higher rate each year.
• Additional rate threshold: Where the 45p rate starts. Lowering it hits a small, very mobile group, so real yields often fall short of the paper figure.
• Basic rate: The rate most people pay. Every manifesto since 2010 has promised not to raise it, which is why governments raise money in less visible ways.
• Higher rate: Paid by roughly 1 in 5 taxpayers. Higher rates encourage salary sacrifice, pension saving and incorporation to avoid it.
• Additional rate: Popular to raise, but top earners can shift income, time bonuses or move abroad. The 50p rate raised much less than forecast.
• Personal allowance taper start: Above £100k you lose £1 of allowance per £2 earned, an effective 60% tax rate. It also cliff-edges free childcare hours, which deters extra work.
• Threshold freeze to 2030-31: Freezing thresholds while wages rise is a stealth tax: fiscal drag. Switching it off means uprating all bands with inflation, a big cost.