UK Income Tax & PAYE Guide 2025-26

Most UK employees have their tax collected automatically through PAYE — but millions pay the wrong amount every year due to incorrect tax codes, unclaimed reliefs, or misunderstood rules. This guide explains exactly how UK income tax and National Insurance work in 2025-26, how to read your payslip and tax code, when you need to file a Self Assessment return, and how to make sure you're not overpaying.

UK Tax System Overview 2025-26

The UK tax year runs from April 6 to April 5 the following year. The 2025-26 tax year runs from April 6, 2025 to April 5, 2026. Key thresholds that have been frozen since 2022-23 (frozen until at least 2027-28 by current government policy):

Because these thresholds are frozen while wages rise with inflation, millions of people are being pushed into higher tax brackets each year — a phenomenon known as "fiscal drag."

Income Tax Bands and Rates 2025-26

England, Wales, and Northern Ireland use the same rates. Scotland has separate rates (covered below):

Important — the £100,000 taper: For incomes above £100,000, the Personal Allowance reduces by £1 for every £2 earned above £100,000. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140. See our UK tax saving guide for how to avoid this trap.

Worked example — £45,000 salary:

• Personal Allowance: £12,570 → taxed at 0%
• Basic Rate band: £45,000 − £12,570 = £32,430 → taxed at 20% = £6,486
• Total income tax: £6,486
• Monthly take-home (before NI): £45,000 − £6,486 = £38,514 ÷ 12 = £3,210/month

How PAYE Works — Pay As You Earn Explained

PAYE (Pay As You Earn) is HMRC's system for collecting income tax and National Insurance directly from employees' wages before they're paid. Your employer deducts the correct amount each pay period and sends it to HMRC on your behalf.

How it's calculated each pay period:

1. HMRC issues you a tax code based on your circumstances
2. Your employer uses the tax code to calculate how much of your pay is tax-free each month/week
3. Income tax and NI are deducted from the taxable portion
4. You receive your net pay — tax already deducted

Monthly vs cumulative basis: Most employees are taxed on a cumulative basis — meaning HMRC looks at your total income and tax paid so far in the year and adjusts each month's deduction so you pay exactly the right amount over the full year. If your income varies month-to-month, this self-corrects automatically.

A Week 1/Month 1 basis is used for new employees where the employer doesn't have a P45 — it taxes each period independently without looking at the year so far. This can lead to overpayment that's corrected later.

UK Tax Codes Explained

Your tax code tells your employer how much tax-free income you're entitled to. It's usually shown on your payslip, P60, or your Personal Tax Account at gov.uk. Common codes:

Wrong tax code? Check your Personal Tax Account at gov.uk or call HMRC on 0300 200 3300. An incorrect tax code can mean significant over- or under-payment. HMRC will issue a P800 after the tax year if you've overpaid and owe you a refund — but you should check proactively.

National Insurance Contributions 2025-26

National Insurance (NI) is separate from income tax but deducted through the same payroll. It funds the State Pension and other benefits. For employed individuals (Class 1 NI), 2025-26 rates:

Important note for 2025-26: From April 2025, the employer NI rate increased from 13.8% to 15%, and the employer NI threshold dropped from £9,100 to £5,000 per employee. This affects employer costs but not employee take-home pay directly. However, employers may respond by offering less in pay rises or benefits — a key reason salary sacrifice (where both employee and employer save NI) is more attractive than ever.

Self-employed NI: If you're self-employed, you pay Class 4 NI: 6% on profits between £12,570 and £50,270, and 2% above £50,270. Class 2 NI was abolished from April 2024.

NI and your State Pension: You need 35 qualifying years of NI contributions for a full new State Pension (£221.20 per week in 2025-26). Check your NI record at gov.uk/check-national-insurance-record. If you have gaps (e.g., from time abroad, studying, or unemployment), you may be able to buy voluntary NI contributions for years going back to 2006 — often a very good financial deal.

Self Assessment — Who Needs to File and When

PAYE handles most employees' tax automatically, but you must file a Self Assessment tax return if you:

• Are self-employed with income over £1,000
• Earn over £100,000 (even if all income is from employment)
• Have income from renting out property
• Have income from abroad
• Have investment income or capital gains above certain amounts
• Receive income from a trust or estate
• Need to claim tax relief that isn't given automatically (e.g., additional pension contributions, Gift Aid for higher-rate taxpayers)
• Receive Child Benefit and either you or your partner earns over £60,000 (High Income Child Benefit Charge)

Key Self Assessment deadlines:

• October 5: Register for Self Assessment if filing for the first time
• October 31: Deadline to file a paper return for the 2024-25 tax year
• January 31, 2026: Deadline to file online for the 2024-25 tax year AND pay any tax owed
• July 31: Second payment on account deadline (if you pay in advance instalments)

The penalty for late filing is £100 immediately, rising to £900 after 3 months, plus interest on unpaid tax. File on time even if you can't pay — the failure-to-file penalty is separate from failure-to-pay interest.

Understanding Your P60, P45, and P11D

• P60 (End of Year Certificate): Issued by your employer every year by May 31. Shows your total pay and tax deducted for the tax year just ended. Keep this — needed for mortgage applications, tax credit claims, and checking if you've been taxed correctly.
• P45 (Leaving Certificate): Given by an employer when you leave a job. Shows pay and tax to that date in the current tax year. Give this to your new employer so they can apply the correct tax code from day one.
• P11D (Expenses and Benefits): If your employer provides benefits (company car, private medical insurance, interest-free loan over £10,000), they report these to HMRC on a P11D. You'll receive a copy. These benefits are taxable — HMRC will adjust your tax code or include them in your Self Assessment.
• P800 (Tax Calculation): HMRC sends this if they believe you've over- or underpaid tax. If you've overpaid, they'll arrange a refund. If you've underpaid, they'll ask you to pay or adjust next year's tax code.

Scottish Income Tax 2025-26

Scotland sets its own income tax rates on earned income (not savings or dividends). Scottish taxpayers pay Scottish rates, which have more bands:

Scottish taxpayers pay higher rates on most income levels above £28,000 compared to the rest of the UK. Your tax code will have an "S" prefix (e.g., S1257L) if you're a Scottish taxpayer.

Student Loan Repayments via Payroll

Student loan repayments are collected by HMRC alongside tax and NI. The repayment rate and threshold depend on which plan you're on:

Repayments are deducted by your employer via payroll — you don't make separate payments. Check your plan type at gov.uk/repaying-your-student-loan. Loans are written off after a certain number of years (25 years for Plan 2, 40 years for Plan 5).

How to Check and Fix Your Tax Bill

Millions of UK taxpayers over- or underpay tax every year, often without knowing. Here's how to stay on top of it:

• Set up a Personal Tax Account: At gov.uk/personal-tax-account — view your tax code, check NI record, claim refunds, and see income from multiple sources.
• Check your tax code every April: HMRC sends a new coding notice (P2) each year. Read it — if your circumstances have changed (new job, ended benefits, Marriage Allowance), the code may need updating.
• Claim tax reliefs: If you work from home, travel for work, buy equipment for your job, or wear a uniform, you may be able to claim flat-rate expenses or actual costs. Claim at gov.uk/tax-relief-for-employees.
• Request a tax check: If you think you've overpaid but haven't received a P800, contact HMRC directly or use your Personal Tax Account to request a tax calculation.
• Keep records: Keep payslips and P60s for at least 4 years. Self Assessment records for at least 5 years after the filing deadline.