Income tax is the tax charged on what an individual earns or receives in a tax year: wages, self-employed profits, pensions, rental profits, savings interest, dividends and some state benefits. For the 2026/27 tax year (6 April 2026 to 5 April 2027), most people get a £12,570 personal allowance tax-free. In England, Wales and Northern Ireland, income above that is taxed at 20% up to £50,270, 40% up to £125,140 and 45% above that. Scotland sets its own bands for earned income. Below is what counts as taxable income, how the tax is worked out and how it is collected.
Income tax definition
In law, income tax is charged for each tax year by an annual Finance Act. Finance Act 2026 charges it for 2026/27 and sets the main rates at 20%, 40% and 45%. In practice it is a tax on people, trustees and personal representatives. Companies pay corporation tax instead. The UK tax year runs from 6 April to 5 April, and your income tax bill is worked out on everything taxable you received in that year, after allowances and reliefs.
HMRC lists the income it taxes as:
- Employment. Salary, bonuses and most benefits in kind;
- Self-employment. Trading profits as a sole trader or partner;
- Pensions. The State Pension, company and personal pensions and annuities;
- Property. Rental profits;
- Savings and investments. Interest above your allowances, and dividends;
- Some state benefits. Examples are Carer's Allowance, contribution-based Jobseeker's Allowance and contribution-based Employment and Support Allowance;
- Trust income. Income you receive from a trust.
Some income is not taxed at all, including ISA returns, Premium Bond prizes and lottery wins, Personal Independence Payment, and the first £1,000 of trading income and the first £1,000 of property income under the trading and property allowances.
Income tax rates and bands for 2026/27
The table below shows the rates for someone in England, Wales or Northern Ireland with the standard personal allowance.
| Band | Taxable income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Wales has the power to set its own rates but has kept them in line with England for 2026/27. Scotland uses six bands from 19% to 48% on non-savings, non-dividend income. See our guide to Scottish tax bands. The personal allowance (£12,570) and the basic rate limit (£37,700) are frozen by law until 5 April 2031, which keeps the higher rate threshold at £50,270. As pay rises, more of it is therefore taxed at higher rates.
The personal allowance is withdrawn by £1 for every £2 of adjusted net income above £100,000, and is nil from £125,140. This creates an effective 60% band, explained in our guide to the £100k tax trap. The point at which 40% tax starts is covered separately.
Savings and dividends are taxed differently
Income is taxed in a set order: earnings, pensions and rental profits first, then savings interest, then dividends. Savings and dividend income have their own allowances and rates, and these apply across the whole UK, including Scotland.
- Starting rate for savings. Up to £5,000 of interest can be taxed at 0%. This allowance falls by £1 for every £1 of other income above your personal allowance;
- Personal savings allowance. £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nothing for additional rate taxpayers;
- Dividend allowance. £500. Dividends above it are taxed at 10.75% (basic), 35.75% (higher) and 39.35% (additional) for 2026/27. The basic and higher rates rose from 8.75% and 33.75% in 2025/26.
More changes are already law. Finance Act 2026 sets savings income rates of 22%, 42% and 47% for 2027/28. It also creates separate property income rates at the same levels for England and Northern Ireland, starting 6 April 2027. The Scottish Parliament and the Senedd will set the property income rates for Scottish and Welsh taxpayers. Landlords and people with large cash savings should plan for both changes now.
How income tax is worked out
The calculation has four steps:
- Total income. Add up all taxable income for the tax year;
- Reliefs. Deduct reliefs such as trading losses and certain interest payments to reach net income;
- Allowances. Deduct the personal allowance, reduced if your income is over £100,000;
- Rates. Charge what is left at the band rates, taking earnings first, then savings, then dividends.
Gift Aid donations and pension contributions made under relief at source don't reduce taxable income. Instead they extend the basic rate band, so higher rate taxpayers get extra relief through their tax return. Our guide to relief at source vs net pay explains how this works for pensions.
Worked illustration (not an HMRC figure): an employee in England earning £40,000 with no other income has £27,430 taxable after the allowance. At 20% that is £5,486 of income tax for the year, before National Insurance, which is a separate charge.
How you pay income tax
Most people pay through PAYE. Employers and pension providers deduct tax before paying you, using the tax code HMRC gives them. HMRC can also collect tax on taxable state benefits, such as the State Pension, through the tax code on your other income.
Everyone else uses Self Assessment. You must file a tax return if you have more than £1,000 of self-employment income or more than £2,500 of other untaxed income, such as tips or rent. Returns for 2025/26 are due online by 31 January 2027, which is also the payment deadline. Larger bills are paid in advance through payments on account on 31 January and 31 July. Since April 2026 some sole traders and landlords must also keep digital records and send quarterly updates under Making Tax Digital.
Income tax and National Insurance are different taxes
National Insurance is charged alongside income tax but is a separate tax with its own thresholds and rates. It applies only to earnings and self-employed profits, not to pensions, savings, dividends or rent. Employees pay Class 1 contributions through payroll. The self-employed pay Class 4 through Self Assessment. When people say their "tax" on a pay rise is 42%, they usually mean 40% income tax plus 2% National Insurance.
Acumon prepares personal tax returns and gives advice on the tax rules for each kind of income through our income tax return service. If you have income from several sources, or you are near one of the thresholds above, our private client tax team can check your position before the tax year ends on 5 April 2027.