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Income tax is a tax paid on many (but not all) types of earnings. If you have a salaried job, receive a pension or work for yourself, there’s a good chance you’re already paying it.
The amount of income tax you’ll need to pay – and how it is collected – will depend on your overall income, the nature of your work and where you live in the UK. So read on to find out how income tax works, how much you need to pay, and where the money goes.
What is income tax?
Income tax does just what it says on the tin. It’s a tax on your income – the money you receive.
Think about the wages you get from your job, the profits you make from running your small business, or the payments you receive from your pension. In most cases, you’ll have to pay income tax on a portion of those earnings.
Some people may also pay tax on benefits they receive through their job — such as a company car or medical insurance — on some state benefits, and also on some interest earned through savings accounts. If you let a property, your rental income may be subject to income tax as well.
» MORE: Tax bands, brackets, rates and allowances
How does income tax work?
The amount of income tax you pay ultimately depends on the size of your overall income.
Income tax is applied to earnings over the Personal Allowance. Your Personal Allowance is the amount of income you don’t have to pay tax on.
The standard Personal Allowance is normally set on a yearly basis. It is usually confirmed in the Budget, which typically takes place in the autumn prior to any changes being made. However, there have been no Personal Allowance changes for a good few years.
The standard Personal Allowance is currently frozen at £12,570 and is set to remain frozen until the 2027/2028 tax year. (The standard Personal Allowance typically used to rise with inflation, although this hasn’t happened since 2021, when the Personal Allowance deep freeze came into effect.)
Meanwhile, the higher-rate income tax threshold – the point at which higher-rate income tax kicks in – is also frozen. The higher rate threshold currently sits at £50,270 and will stay the same until 2028, based on current plans.
If you earn more than £100,000 a year, your Personal Allowance is reduced by £1 for every £2 over that threshold. As such, once you earn £125,140 a year you no longer have the benefit of a Personal Allowance and all of your income is subject to tax.
Does everyone pay income tax?
Aside from earnings shielded by the Personal Allowance, the majority of us will pay tax on any money we earn. However, there are some exemptions, including the following:
- the first £1,000 earned each year if you’re self-employed
- the first £1,000 of rental income each year if you rent out a property
- if you rent out a room in your home, no tax is paid on the first £7,500 you earn each year
- any interest earned on savings accounts that are exempt from tax, including individual savings accounts (ISAs)
- dividends earned from company shares, up to a yearly allowance, which is currently £500. However, share dividends can be totally exempt from income tax if they are held within a tax-free wrapper, such as a stocks and shares ISA.
- some state benefits, including child benefit
- money won through Premium Bonds or the National Lottery
How much is income tax?
Income tax in England, Wales and Northern Ireland has three tiers: basic, higher-rate and additional rate. You’ll be charged a different level of income tax depending on which bands your income falls into.
As of April 2025, the following income tax rates apply in England, Wales and Northern Ireland:
- 20% on earnings from £12,570 to £50,270 (basic)
- 40% on earnings from £50,271 to £125,140 (higher rate)
- 45% on earnings over £125,140 (additional rate)
Scotland uses slightly different income tax bands. As of April 2025, the following income tax rates apply in Scotland:
- 19% on earnings from £12,571 to £15,397 (starter rate)
- 20% on earnings from £15,398 to £27,491 (basic rate)
- 21% on earnings from £27,492 to £43,662 (intermediate rate)
- 42% on earnings from £43,663 to £75,000 (higher rate)
- 45% on earnings from £75,001 to £125,140 (advanced rate)
- 48% on earnings over £125,140 (top rate)
Additionally, all UK taxpayers’ Personal Allowance is tapered. Once their income exceeds £100,000, their £12,570 personal allowance (the tax-free income they can earn each year) gradually decreases. For every £2 earned over £100,000, their allowance reduces by £1 until it eventually disappears.
How do I pay income tax?
The way you pay income tax depends on your employment.
The majority of people pay income tax via Pay As You Earn (PAYE). This way tax is automatically taken from your wages or pension provider at source – before what’s left over hits your bank account.
Everyone has a tax code that explains how they will be taxed. If you pay income tax via PAYE, your tax code is applied by your employer or pension provider to work out what your Personal Allowance is and how much income tax to deduct.
Those who are self-employed and some higher earners pay tax a little differently. They need to fill out a self-assessment tax return once a year and manually make a payment to HM Revenue & Customs (HMRC).
» MORE: What is Making Tax Digital?
Where does my income tax money go?
Where does your hard-earned money go? Well, the government uses taxes (like income tax and National Insurance) to fund public spending.
In the latest government report, welfare, health, state pensions, national debt interest, and education were the areas where the majority of the money went. It also helped fund other areas including defence, transport, culture, overseas aid and policing.
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