GentongBet

Taxes are a fact of life and income tax is usually the most important for the majority of us. But income tax in the UK is not the same for everyone. Income tax brackets in the UK put people into different categories, with different levels of tax depending on your income.

We also calculate and pay our income tax in different ways, either through our workplace or through self-assessed tax returns. It is also the responsibility of employers to accurately deduct it from payslips and provide the correct information to HMRC.

Let’s take a look at how income tax works in the UK, including the brackets, the personal allowance and how it’s calculated.

What is income tax?

Simply put, income tax in the UK is a tax you pay on what you earn. This could be money you earn from working, income from renting a property, profits you make as a self-employed person, or things like pensions and other state benefits.

How much you pay depends on how much you earn, as well as a few other factors. This is divided into tax brackets, which dictate the rate you pay. As you earn more, you move into higher brackets, so you pay more on specific portions of your income.

Most people also get a personal allowance, which is an amount you don’t have to pay tax on. But we’ll come back to that later.

There are also many types of income which are not subject to income tax in the UK, including interest from certain bank accounts such as Individual Savings Accounts (ISAs), certain state benefits and winnings from the National Lottery or Premium Bonds.

How is income tax collected?

HMRC collects income tax in several ways, mainly depending on your employment status. Most people will pay their income tax via PAYE (Pay As You Earn), meaning their employer will deduct it from their salary using their tax code.

The other way to pay income tax in the UK is to complete a self-assessment, in which you provide details of your income from self-employment, rentals or other sources.

Accuracy and timeliness are essential with both methods, with penalties applied for late submission of returns or failure to deduct the correct amounts. This is why it is so important for business owners and managers to understand their UK income tax and payroll obligations. Even when you automate the process with software or outsource payroll to someone else, it’s still your legal responsibility to get it right.

What is the personal allowance?

In the UK, the personal allowance is the amount you can earn each financial year before having to pay income tax.

The standard personal allowance for the current tax year 2025/26 is £12,570. This is the same as the previous two years, but it may change from time to time due to the government setting new budgets and policies. So if your salary was £30,000 a year, you would only pay income tax on £17,430.

Your personal allowance also reduces if you earn more than £100, or £1 for every £2 over the threshold. This means it drops to zero once you earn more than £125,140, ​​meaning you will pay income tax on all your earnings.

UK Income Tax Bands and Rates 2025/26

In the UK, income tax is calculated using a tax bracket system. These brackets determine how much tax you pay on different parts of your income. As your income increases, each share falls into a specific bracket, with higher rates only applying to income above certain thresholds.

A common misconception is that moving to a higher tax bracket means you’ll pay that higher rate on all your income. In reality, each rate only applies to income falling within its range. For example, if you earn £55,000, you will pay 20% on the part between £12,571 and £50,270, and 40% only on the amount above £50,271. Everything up to your personal allowance is tax free.

Here’s how much you pay per tax bracket in the 2025/26 financial year:

Band	Taxable income	Tax rate
Personal allowance	Up to £12,570	0%
Base rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	over £125,140	45%

Although income tax applies across the UK, devolved governments may set their own rates or have slightly different tax brackets. Currently, the Welsh Government has set income tax rates in Wales to match those in England, while Scotland has slightly different tax bands above the standard personal allowance. Income tax in Northern Ireland is currently the rates in England and Wales.

How Employers Calculate and Deduct Income Tax

Taxpayers working full time generally have their income tax managed by the PAYE system. If you are an employer or HR professional responsible for payroll, you are very familiar with PAYE.

PAYE is the way most people pay their income tax and national insurance contributions. HMRC provides employers with tax codes to calculate these amounts. You’ll find more about tax codes in our downloadable guide.

The tax code gives an employer the information it needs to determine how much tax each employee owes. Employees will then see this information on their payslips, showing deductions such as income tax and national insurance as well as items such as student loan repayments.

What happens if employees pay too much or too little in taxes?

Accuracy is important when it comes to payroll and tax calculations, but errors can happen. Often this can be due to internal administrative errors or sending the wrong tax code due to a job change, for example. More than 90% of UK businesses admit to making payroll errors every month, resulting in thousands of losses each year.

An employee will only know whether they have underpaid or overpaid their taxes at the end of a tax year, after which HMRC will send a letter, known as a P800. These letters are sent starting in June of the following tax year, so it may take some time to know if there is a problem. The letter will tell the employee how to get a refund of the overpaid tax or how to pay the taxes owed.

Usually this can be done automatically by collecting the taxes due on their payslips the following year, while requesting a refund of overpaid tax can be done online. However, since April 2024, obtaining a tax refund via PAYE is no longer automatic and employees must actively pursue their claim.

Another type of communication from HMRC about income tax discrepancies is known as a straight assessment letter, sent if taxes owed exceed £3,000 or cannot be automatically deducted from an employee’s income as usual.

Reimbursements generally arise due to a change in circumstances during the financial year, such as overlaps in leaving or starting a new job or interruptions in employment.

Underpaying taxes can occur due to factors such as earning money outside of your regular job or being subject to an emergency tax code.

Advice for employers managing PAYE

Managing PAYE as an employer can be done in several ways, both manually and automatically through payroll software. Although your payroll systems will be responsible for running the calculations, it’s good to have an idea of ​​how PAYE works so you can recognize errors if they occur.

• Make sure your tax codes are accurate – The heart of PAYE is using an employee’s tax code as provided by HMRC. This code dictates the amount of income tax an employee is liable to pay, provided the information held by HMRC is correct. As an employer, you will be notified of any changes to an employee’s code. Applying the correct tax code is essential for an employer, so make sure your records are always up to date.
• Use reliable payroll software – Payroll can be done in-house manually or using payroll software, or you can outsource it to a vendor. Regardless, you are legally responsible for carrying out PAYE tasks within payroll. Using a reliable and integrated payroll software system will make this much easier.
• Keep up to date with RTI submissions – Payroll is accompanied by submissions to HMRC, known as Real Time Information (RTI). This includes Full Payment Submission (FPS), done every time you pay an employee. It is essential that you follow them and pay them on time, otherwise you could be fined.
• Provide clear communication to employees– As with most aspects of managing a workforce, communication is key. Providing your employees with timely compensation information is essential to maintaining trust.

How Employment Hero can help you

Managing tax codes, PAYE, RTI and everything that comes with payroll can take over your working life – but it doesn’t have to be. Using Employment Hero’s payroll services can make compliance simple and scalable. Whether you’re just starting out or taking your business to new heights, we have the right solution for your needs.

From payroll software to outsourcing, we can make payroll effortless. Talk to us today to find out how.