When do you start paying tax on earnings, and by how much?
I was chatting to a friend the other day who wasn’t excited about a pay rise they’d just got. Instead they were worried they’d now have to pay 40% tax on their earnings. What was the point of earning more if they’d actually get less?
This is a pretty common confusion. Though they would be taxed more on some of their extra earnings, the good news was it was only the cash made over a certain threshold. So, in most cases, a pay rise is always worth it!
But I thought this was a good opportunity to explain how tax bands work. Now, for the most part this will specifically cover England, Wales and Northern Ireland. Though the principles are the same, Scotland have their own bands, and I’ll include those actual rates at the end.
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The personal allowance
To start off, most people can earn up to £12,570 a year and pay no tax on it at all. That’s regardless of how you earned the money. This is known as the personal allowance.
For most people this will be eaten up by your salary, but if you’re not working then savings interest also counts.
However, if you earn more than £100,000 a year, this starts to reduce, until it completely disappears. Effectively for every £2 you earn above this amount, the personal allowance reduces by £1. So once you earn £125,000, there is no personal allowance and you’ll pay tax on all your earnings. So it’s in this range where getting a pay rise could actually be band thing.
You might also find your personal allowance is reduced or increased if you’ve underpaid or overpaid tax in a previous financial year. That’s because unless you sort this out manually, HMRC can use future earnings to claw back or refund the owed money. It’s worth checking your tax code each year to ensure this is correct.
The personal allowance and it’s reduction when you earn over £100,000 applies to the whole of the UK, including Scotland.
Income tax vs National Insurance and other taxes
When we’re looking at these tax bands, we’re talking about Income Tax. This is, as the name suggests, tax you pay in income you earn. So this could be your salary, but it could also be savings interest, investment dividends, rent as a landlord or extra cash from side hustles.
Now, Income Tax is not the only ‘tax’ due on some of these, with the most obvious deduction from your salary also being National Insurance. This has it’s own thresholds, though for a few years now it’s matched the main tax bands.
For investments you will also be faced with capital gains tax when you sell and dividend tax on any pay outs. These amounts also change depending on your tax bracket, however you do get tax free allowances each year.
Basic rate tax
Once you start earning above the personal allowance, you’ll start to pay tax on earnings. But importantly, it’s just on the earnings above this threshold.
The first of these tax brackets is known as the basic rate, and in England, Wales and Northern Ireland you’ll lose 20% of what you make between £12,571 and £50,270 to the tax man.
So for example, if you earn £45,000 a year, you’ll pay 20% on the difference between £45,000 and the tax free allowance of £12,570. This taxable income is £32,429, which would have an income tax amount of £648.58.
| Salary | £45,000 |
| Tax free amount | £12,570 |
| Amount taxed at 20% | £32,429 |
Higher rate tax
The next threshold kicks in on earnings about £50,270, and you’ll then pay 40% tax on earnings above this amount.
So for someone earning £55,000 year, it means they pay 20% tax on all the money between the personal allowance and the new threshold, then 40% on the £4,730 above it.
| Salary | £55,000 |
| Tax free amount | £12,570 |
| Amount taxed at 20% | £37,700 |
| Amount taxed at 40% | £4,730 |
The 60% tax trap
The higher rate threshold continues until £125,140. Remember though, this reduction of the personal allowance begins at £100,000. And this can result in a higher higher tax burden, often known as the 60% tax trap.
That’s because you’re now paying extra tax on the first chunk of cash, at 20%, alongside the 40% tax on the higher amounts. So for every £100 you make over £100,000 to £125,140 you lose £60 in tax, hence the 60% tax figure.
However, you can get around this by contributing more to your pension. You’ll get tax-relief on this payment, which brings down your take-home income and lowers the effective tax rate.
Doing this can also help high earners when it comes to things like child benefit, while both additional and higher rate tax payers can use the same method to increase or reinstate the personal savings allowance.
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Additional rate tax
The final threshold (in everywhere but Scotland) is for earnings over £125,140. You’ll already have lost the personal allowance, so will be paying more at 20%, and then the additional income above the bracket gets 45% deducted in Income Tax.
| Salary | £135,000 |
| Tax free amount | £0 |
| Amount taxed at 20% | £50,270 |
| Amount taxed at 40% | £74,870 |
| Amount taxed at 45% | £9,860 |
How much tax will you pay?
England, Wales and Northern Ireland rates for 2026/27:
| Earnings | Tax rate | Tax bracket |
| First £12,570 | 0% | Personal allowance |
| Between £12,571 and £50,270 | 20% tax | Basic rate |
| Between £50,271 and £125,140 | 40% tax | Higher rate |
| From £125,141 | 45% tax | Additional rate |
Scotland rates for 2026/27:
If you live in Scotland, the principles all remain the same as for the rest of the UK, but there are additional tiers added in.
| Earnings | Tax rate | Tax bracket |
| First £12,570 | 0% | Personal allowance |
| Between £12,571 and £16,537 | 19% tax | Starter rate |
| Between £16,538 and £27,491 | 20% tax | Basic rate |
| Between £27,492 and £43,662 | 21% tax | Intermediate rate |
| Between £43,663 and £75,000 | 40% tax | Higher rate |
| Between £75,001 and £125,140 | 45% tax | Additional rate |
| From £125,141 | 48% tax | Top rate |
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Frozen thresholds & ‘fiscal drag’
Theoretically, the personal allowance and tax bands should increase each financial year. This would allow for wage growth and inflation. However, since 2021, the bands in England, Wales and Northern Ireland have remained the same, that’s that’s set to remain the case until at least 2031.
It might seen innoculous, but it’s actually a stealth tax raid. Every time you get a pay rise (rather than a hike due to a promotion), you’ll get closer to a new tax band. And once you go past it, you’ll be subject to a higher rate of tax – something you really shouldn’t.
This is true for other income too. Right now the state pension is less than the personal allowance, but that’s predicted to change from the 2027/28 tax year.
Other ‘income’ tax allowances
You can reduce how much tax you pay on some of your income if you match certain criteria. Here are some of the main ones to be aware of.
Personal savings allowance
Though savings interest is taxed based on your highest income tax rate, basic and higher rate tax payers can respectively earn £1,000 and £500 in interest tax free each year. More on the personal savings allowance (PSA).
Starting rate for savings
Lower earners can get even more tax-free interest, and that’s alongside the PSA.
Those who have any earnings, whether salary or interest, below £12,570, get an extra £5,000 on top for interest. Then, for every £1 earned above the personal allowance, this reduces by £1. More on the starting rate for savings.
Marriage allowance
Couples in a marriage or civil partnership might be able to transfer over some of their personal allowance to their partner. To qualify, one must be a non-tax payer and the other can only be a basic rate tax payer. If that’s the case, 10% can be moved over to the tax payer, worth £252 a year. And you can backdate it too. More on the marriage tax allowance.
Blind person’s allowance
There’s a boost to the personal allowance if you or your partner is registered as blind or with severely impaired eye sight.
Side hustle allowance
The Trading allowance means you can earn up to £1,000 extra cash on the side before Income Tax kicks in.
Rent-a-room relief
There’s also a scheme that means you can earn £7,500 a year tax-free by renting out a spare room to a lodger.
