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The personal allowance and how it works

Everyone who pays UK income tax receives a personal allowance — an amount you can earn each year before any income tax is due. For 2026/27 the standard personal allowance is £12,570, unchanged since 2021/22 as part of a deliberate freeze. This means that as wages rise with inflation, more people are pulled into higher tax bands — a process known as fiscal drag.

If your adjusted net income exceeds £100,000, your personal allowance is reduced by £1 for every £2 of income above that threshold. At £125,140 it is eliminated entirely. Making a pension contribution or gift aid donation can bring your income back below £100,000 and restore some or all of the allowance.

UK income tax bands for 2026/27

Income tax in England, Wales, and Northern Ireland is charged in bands on income above the personal allowance. The basic rate of 20% applies from £12,571 to £50,270. The higher rate of 40% applies from £50,271 to £125,140. The additional rate of 45% applies above £125,140. These thresholds are frozen until April 2028, so a salary increase of just 3–4% a year can move a basic-rate taxpayer into the higher band within a few years.

Scotland sets its own income tax rates and bands. Scottish taxpayers pay the starter rate of 19% on the first slice of taxable income, then 20%, 21%, 42%, and 45% at higher levels — five bands compared to three in the rest of the UK. Use the Scotland toggle in the calculator to see how your take-home differs.

The effective 60% tax rate between £100,000 and £125,140

Between £100,000 and £125,140 you lose £1 of personal allowance for every £2 earned. That lost allowance is taxed at 40%, creating an effective marginal rate of 60% on income in this band (40% higher-rate tax plus 40% tax on the lost allowance, halved because the taper is £1 per £2). For someone earning £120,000, a £10,000 pay rise may net less than £4,000 after tax.

The most common strategy to escape this trap is to make additional pension contributions. A salary-sacrifice contribution reduces your adjusted net income pound-for-pound, which can restore your personal allowance and bring your effective rate back down to 40%.

National Insurance: a second income tax in all but name

National Insurance (NI) is a separate deduction from income tax, although it works similarly. Employees pay Class 1 NI at 8% on earnings between £12,570 and £50,270, and 2% on earnings above £50,270. There is no NI-free allowance in the same way as income tax — the lower earnings limit of £6,396 gives entitlement to state pension credits but no actual deduction until £12,570.

Unlike income tax, NI contributions do not apply to pension income, savings interest, or dividends. They are assessed weekly or monthly, not annually, which means that a large one-off bonus can attract a higher NI rate than the same amount spread across the year. Your employer also pays secondary Class 1 NI at 15% on your earnings above £5,000 — a cost that does not appear on your payslip but directly affects what your employer can afford to pay you.

How pension contributions affect your take-home pay

The way your pension contributions are treated depends on the scheme your employer uses. With salary sacrifice, your gross pay is reduced before tax and NI are calculated. A 5% contribution on a £40,000 salary reduces your taxable pay to £38,000, saving both income tax and employee NI. This is the most tax-efficient arrangement and is used by most large employers.

With a net pay arrangement, the contribution is deducted from gross pay before income tax but after NI. With relief at source, you contribute from net pay and the pension provider claims basic-rate tax relief (20%) from HMRC, topping up your pot automatically. Higher and additional-rate taxpayers must claim the extra relief through self-assessment. Use the pension scheme selector in the calculator to compare how much each arrangement adds to your pot and saves in tax.

Student loan repayments: which plan applies to you

Student loan repayments are collected through PAYE alongside tax and NI. Which plan you are on depends on when and where you studied:

• Plan 1 — started before September 2012 in England/Wales, or any time in Northern Ireland. Repay 9% above £24,990.
• Plan 2 — started on or after September 2012 in England/Wales. Repay 9% above £28,470.
• Plan 4 — studied in Scotland. Repay 9% above £31,395.
• Plan 5 — new undergraduate loans in England from August 2023 onwards. Repay 9% above £25,000.
• Postgraduate Loan — master's or doctoral loans in England/Wales. Repay 6% above £21,000, alongside any undergraduate plan.

Repayments stop automatically once the loan is cleared or written off (typically 25–40 years after repayment begins, depending on the plan). Unlike a commercial debt, outstanding balances do not affect your credit score.

Understanding your tax code

Your tax code tells your employer how much of your income is tax-free each year. The most common code is 1257L, which corresponds to the standard £12,570 personal allowance. The number is the allowance divided by 10; the letter indicates your circumstances. An emergency code of BR taxes all income at 20% with no allowance, which can happen when you start a new job before your P45 arrives.

If your code is wrong — for example because HMRC has adjusted it for a benefit-in-kind or an unpaid tax debt from a previous year — you may be paying too much or too little tax. You can check and update your tax code through your personal tax account on HMRC's website. Overpaid tax is refunded through self-assessment or, for PAYE employees, automatically at the end of the tax year.