Income tax and take-home pay — how UK tax really works

Why this is worth an hour of your time

Income tax is the largest bill most people ever pay, and the one they understand least. Everyone knows “the basic rate is 20%”; far fewer know that a £1 pay rise can cost them 62p, that a tax code is a guess HMRC can get wrong, or that earning £60,001 can start quietly taking back their child benefit. None of that is exotic — it’s the ordinary machinery of the system, and once you can see it, most of the “is it worth it?” questions about pay rises, pensions and bonuses answer themselves.

Figures below are for the 2026/27 tax year (6 April 2026 – 5 April 2027) in England, Wales and Northern Ireland unless stated; Scotland has its own section. The personal allowance and the main thresholds are frozen until April 2031 — which means that as pay rises, more of it drifts into higher bands every year. That “fiscal drag” is a tax rise nobody has to announce.

The bands, and what “40% taxpayer” actually means

Everyone gets a personal allowance of £12,570 — income you pay no tax on. Above it, income is sliced into bands, and each slice is taxed at its own rate:

The single most important idea in UK tax: only the slice above each threshold is taxed at the higher rate. A pay rise that tips you into the 40% band does not make your whole salary taxed at 40% — it makes the pounds above £50,270 taxed at 40%. Nobody ever takes home less by earning more from the bands alone. (The cliff-edges you hear about come from things bolted on to the bands — the 60% trap, the child benefit charge, childcare support — all below.)

So a “40% taxpayer” earning £60,000 pays 0% on the first £12,570, 20% on the next £37,700 and 40% only on the top £9,730. Their average rate of income tax is about 19%; their marginal rate — the rate on the next £1 — is 40%. The marginal rate is the one that matters for decisions: it’s what a bonus is taxed at, and what a pension contribution saves.

National Insurance — the second income tax

National Insurance is, for most purposes, another tax on earnings, with its own thresholds and one important quirk: it’s charged on earnings only (not pensions, savings, dividends or rent), and it stops at State Pension age.

• Employees (Class 1): 8% on earnings between £12,570 and £50,270, then 2% on everything above. Worked out per pay period, not annually — so a bonus month can push more of that month’s pay into the 2% band, but you don’t get a refund for months below the threshold.
• Your employer also pays 15% on your earnings above £5,000. You never see it on your payslip, but it’s part of what you cost — and it’s why salary sacrifice is so valuable (more below).
• Self-employed (Class 4): 6% on profits between £12,570 and £50,270, then 2%. Class 2 is no longer compulsory; paying it voluntarily can still be a cheap way to protect your State Pension record on very low profits.

Notice the shape: NI is heavier on basic-rate earnings (8%) than on higher-rate earnings (2%). That’s why the combined rate jumps from 28% to only 42% at £50,270, not to 48%. NI also builds your State Pension entitlement — the one tax that comes with a receipt.

A worked payslip: £60,000 salary

Before any pension contribution, student loan or child benefit charge. Every extra £1 of salary at this level costs 40p tax + 2p NI — a 42% marginal rate — before the student loan’s 9% or the child benefit charge are added on.

The order everything is worked out in

Most confusion about tax comes from not knowing what gets taken off before what. There are two orders to know: the one on your payslip, and the one on a full tax calculation.

On a payslip (PAYE):

1. Gross pay — salary, overtime, bonus, plus the value of any taxable benefits HMRC is collecting through your code.
2. Salary sacrifice comes off first. Pension, cycle-to-work or EV schemes taken by sacrifice reduce your pay before anything else is calculated — so they save income tax, NI and student loan repayments together.
3. NI and student loan are worked out on that post-sacrifice pay.
4. Net-pay pension contributions (many workplace and public-sector schemes) come off next — they save income tax but not NI.
5. Your tax code’s allowance is subtracted, and income tax is charged on what’s left at your band rates.
6. Take-home is what remains. Relief-at-source pension contributions (most personal pensions and SIPPs, some workplace schemes) come out of this already-taxed pay, and the provider adds basic-rate relief afterwards — the pension tax relief guide covers how to tell which you’re in.

On a full tax calculation (Self Assessment, or HMRC’s end-of-year check):

1. Add up all taxable income and sort it into three piles: non-savings (earnings, pensions, rent, self-employed profit), savings (interest), and dividends.
2. Deduct reliefs — e.g. net-pay pension contributions, trading losses.
3. Set the personal allowance against non-savings income first, then savings, then dividends. (Its size is fixed first, from your adjusted net income — see the 60% trap.)
4. Tax each pile stacked on top of the last. Non-savings income fills the bands first; savings sit on top of it; dividends sit on top of everything. That’s why a £5,000 dividend can be taxed at higher-rate dividend rates even though your salary alone is “only just” in the higher band — it’s the top slice.
5. Apply the savings allowances within the stack: the starting rate for savings (up to £5,000 of interest at 0%, shrinking £1 for £1 as non-savings income exceeds the personal allowance), the personal savings allowance (£1,000 basic-rate, £500 higher-rate, nothing additional-rate) and the £500 dividend allowance. These still use up band space even though they’re taxed at 0%.
6. Dividend rates are 10.75% / 35.75% / 39.35% by band from April 2026; savings interest is taxed at 20% / 40% / 45%. (Savings and rental income rates are due to rise by 2 percentage points from April 2027.)
7. Subtract tax reducers — Marriage Allowance, maintenance relief, venture-capital scheme relief.
8. Add charges on top — the High Income Child Benefit Charge, any pension annual allowance charge, underpaid tax from earlier years.
9. Subtract tax already paid through PAYE or deducted at source. The balance is what you owe or are owed.

Capital gains are worked out separately afterwards, but your income decides which CGT rate applies — gains also stack on top.

The 60% trap (£100,000 – £125,140)

Above £100,000 of adjusted net income (roughly: total taxable income minus grossed-up personal pension contributions and Gift Aid), the personal allowance is withdrawn at £1 for every £2. By £125,140 it’s gone completely.

Follow one extra £1 at £110,000: it’s taxed at 40p, and it destroys 50p of personal allowance, which means another 50p of income becomes taxable at 40% — a further 20p. Total: 60p tax on £1, or 62p with NI, 71p for a Plan 2 graduate. Above £125,140 the rate falls back to 45%. A system where someone on £115,000 faces a higher marginal rate than someone on £500,000 is not designed; it’s accreted.

The same £100,000 line is also the cliff edge for tax-free childcare and funded childcare hours — lose them by earning £1 too much, and for parents of young children that can be worth more than the entire year’s pay rise.

The escape is the same as for the child benefit charge below: pension contributions reduce adjusted net income. Salary sacrifice or a personal contribution that brings you back to £100,000 gets relief at 60%+ and can restore the childcare support too. The pension tax relief guide has the details, and the marginal tax calculator shows the exact contribution needed.

The High Income Child Benefit Charge (£60,000 – £80,000)

If you or your partner claim child benefit and either of you has adjusted net income over £60,000, the higher earner repays 1% of the child benefit for every £200 above £60,000. At £80,000 the charge equals the full benefit.

The money involved is real. For 2026/27, child benefit is about £27.05 a week for the first child and £17.90 for each other (check gov.uk for the current rates) — roughly £1,400 a year for one child, £2,340 for two. Clawing £2,340 back over a £20,000 band adds about 11.7 percentage points to the higher earner’s marginal rate: a 42% taxpayer with two children is really paying around 54% between £60,000 and £80,000, and more with three.

What to know about it:

• It’s based on individual income, not household income. Two parents on £55,000 each keep all their child benefit; one parent on £80,000 with a non-earning partner keeps none. It’s widely recognised as unfair; a move to household assessment was considered and dropped.
• The higher earner pays it, even if the other partner receives the benefit — which is how people end up owing a charge they didn’t know about. Partners include unmarried couples living together.
• Paying it. Employed people can now ask HMRC to collect it through their tax code instead of filing a return; otherwise it means registering for Self Assessment.
• Don’t stop claiming — opt out of the payments instead. If your income is well over £80,000, you can tell HMRC you don’t want the money, but keep the claim open. The claim is what gives a non-working parent National Insurance credits toward their State Pension (for children under 12) and gets the child a National Insurance number automatically. Not claiming at all is a quiet, expensive mistake.
• Pension contributions reduce it, exactly as with the 60% trap.

Tax codes — reading the letters

Your tax code tells your employer (or pension provider) how much tax-free pay to give you each pay period. The standard code is 1257L: the number is your allowance with the last digit dropped (£12,570), and L means the standard personal allowance. HMRC adjusts the number for things it’s collecting or giving through your pay — a company car or medical insurance lowers it; a job expense or Marriage Allowance raises it.

The things worth checking at least once a year, in your HMRC app or personal tax account:

• Two jobs or a job plus a pension: your allowance should be in only one place. Allowance split wrongly or given twice is the classic cause of a surprise bill.
• Emergency codes after starting a job or taking a pension lump sum — fine for a month or two, but they can overtax heavily. Pension withdrawals are the worst culprit; overpaid tax is reclaimable.
• Out-of-date benefits — a company car you returned or a work expense you no longer have.
• The tax-year-end letter (P800 or Simple Assessment) — if HMRC says you underpaid, check its figures; it’s not infallible. Underpayments under £3,000 are usually collected through next year’s code.

Scotland — different rates on the same bands of pay

If you live in Scotland, the Scottish Parliament sets your income tax rates and bands on earnings, pensions and rent. Savings and dividend income still use the UK rates, and National Insurance is UK-wide — which matters, as you’ll see. The personal allowance is the same £12,570. For 2026/27:

Check the current figures on gov.scot — they’re set each year in the Scottish Budget. What this means in practice:

• Below about £33,000, Scots pay slightly less than the rest of the UK (by up to a few tens of pounds a year).
• Above that, they pay more — around £1,500 more a year at £50,000.
• The 50% band. Between £43,663 and £50,270, a Scottish taxpayer pays 42% income tax plus 8% NI, because the NI threshold follows the UK higher-rate threshold, not Scotland’s. That’s a 50% marginal rate on ordinary middle incomes.
• The 60% trap becomes 67.5% (45% × 1.5) plus 2% NI — and the HICBC and childcare cliffs apply unchanged.
• Pension relief is worth more. Scottish higher and advanced-rate taxpayers can claim 42% or 45% relief, and even intermediate-rate payers are due an extra 1% — all of which has to be claimed if your pension uses relief at source.

Welsh taxpayers (the C code) currently pay exactly the same rates as England. The marginal tax calculator uses the England/Wales/NI bands; Scottish readers should treat its income-tax line as a lower bound above about £33,000.

Self Assessment — who files, and the dates that matter

Most employees and pensioners never file a tax return: PAYE does the work. You need Self Assessment if, among other things:

• you’re self-employed with turnover above the £1,000 trading allowance, or a partner in a partnership;
• you have rental income (above the £1,000 property allowance — smaller amounts can sometimes go through your tax code instead);
• you owe the High Income Child Benefit Charge and haven’t had it put into your tax code;
• you have untaxed income HMRC can’t collect another way — significant savings interest or dividends, foreign income, or capital gains above the allowance (the latter can also be reported in-year through HMRC’s real-time service);
• you need to claim higher-rate pension relief on relief-at-source contributions (you can also write to HMRC instead — see the pension tax relief guide);
• HMRC has sent you a notice to file — at which point you must, even if you think you owe nothing.

The calendar for the 2026/27 tax year:

Payments on account catch people out in their first year: if your bill is over £1,000 and less than 80% of your tax was collected at source, HMRC asks for next year’s tax in advance — half in January, half in July — on top of this year’s bill. Your first January can therefore be 150% of what you expected. If your income has fallen you can apply to reduce them.

Miss the online deadline and there’s an automatic £100 penalty, even if you owe nothing, rising after three months — plus interest on any late tax. File early even if you pay at the deadline: you’ll know the bill in time to plan.

Making Tax Digital now applies to self-employed people and landlords with qualifying income over £50,000: since April 2026 they must keep digital records and send quarterly updates through compatible software. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028.

The levers that legitimately reduce the bill

• Pension contributions — the biggest one, by far. Salary sacrifice saves tax, NI and student loan; any contribution reduces adjusted net income for the 60% trap and HICBC. See pension tax relief and workplace pensions.
• ISAs — all interest, dividends and gains inside are tax-free and don’t appear in the income stack at all. See ISA investing.
• Marriage Allowance — if one partner earns under £12,570 and the other is a basic-rate taxpayer, £1,260 of allowance can transfer, worth £252 a year, backdated up to four years.
• Gift Aid — extends your basic band and reduces adjusted net income; higher-rate donors can reclaim the difference.
• Work expenses and professional fees — uniform washing, professional subscriptions, working from home where your employer requires it. Small, but claimable through your tax code.
• Splitting income between couples — savings in the lower earner’s name, using both people’s allowances.

The one-line summary

Only the slice above each threshold pays the higher rate — but the system bolts cliffs onto the bands at £50,270, £60,000 and £100,000, so know your marginal rate, check your tax code every year, and remember that pension contributions are the lever that switches most of the cliffs off.

Related guides & tools

• Marginal tax calculator — your own take-home, marginal rate and what a pension contribution or pay rise really changes
• Pension tax relief — how relief arrives, and why the £100,000 cliff makes contributions so valuable
• Workplace pensions — salary sacrifice and the employer match
• Student loans — the 9% that stacks on top of everything here
• State Pension and National Insurance — what your NI actually buys
• Investing outside ISAs — dividend tax, savings income and capital gains in practice

Last reviewed: October 2026.