1. Income Tax

Income tax is charged on your earnings from employment, self-employment, pensions, and most other income sources. The UK uses a progressive tax system, meaning you pay higher rates on higher portions of your income.

Income Tax Rates 2025/26

• Personal Allowance: £12,570 (tax-free)
• Basic Rate (20%): £12,571 to £50,270
• Higher Rate (40%): £50,271 to £125,140
• Additional Rate (45%): Over £125,140

How It Works

You don't pay 20% on your entire salary. Instead, you pay different rates on different portions. For example, if you earn £40,000:

• First £12,570: £0 (personal allowance)
• Next £27,430 (£12,571-£40,000): £5,486 at 20%
• Total income tax: £5,486

Use our Salary Calculator to see exactly how much tax you'll pay on your income.

Personal Allowance Reduction

If you earn over £100,000, your personal allowance is reduced by £1 for every £2 you earn above this threshold. By £125,140, your personal allowance is completely gone, creating an effective 60% tax rate on income between £100,000-£125,140.

2. National Insurance (NI)

National Insurance is a tax on earnings that funds state benefits like the NHS, state pension, and unemployment benefits. Both employees and employers pay NI contributions.

Employee NI Rates 2025/26

• £0 - £12,570: 0%
• £12,571 - £50,270: 12%
• Over £50,270: 2%

Why Does NI Rate Drop?

Many people wonder why NI drops from 12% to 2% at higher incomes. This is because you've already qualified for maximum state pension benefits, so you pay a reduced rate on earnings above £50,270.

Self-Employed NI

Self-employed individuals pay Class 2 NI (£3.45/week if profits exceed £12,570) and Class 4 NI (9% on profits between £12,570-£50,270, then 2% above).

3. Combined Tax and NI

Most people think about their "tax rate" as a single number, but you actually pay both income tax and National Insurance. Here's what you really pay at different income levels:

Effective Tax Rates

• £20,000 salary: 13.5% effective rate (£2,703 total deductions)
• £30,000 salary: 17.3% effective rate (£5,186 total deductions)
• £40,000 salary: 19.4% effective rate (£7,769 total deductions)
• £50,000 salary: 21.2% effective rate (£10,602 total deductions)
• £60,000 salary: 26.4% effective rate (£15,802 total deductions)
• £100,000 salary: 31.8% effective rate (£31,832 total deductions)

Your marginal rate (tax on the next £1 earned) is even higher:

• £12,571-£50,270: 32% marginal rate (20% tax + 12% NI)
• £50,271-£100,000: 42% marginal rate (40% tax + 2% NI)
• £100,000-£125,140: 62% marginal rate (60% tax + 2% NI due to personal allowance withdrawal)
• Over £125,140: 47% marginal rate (45% tax + 2% NI)

4. Stamp Duty Land Tax (SDLT)

Stamp Duty is a tax on property purchases in England and Northern Ireland. Scotland and Wales have their own systems (LBTT and LTT).

Standard Residential Rates 2025/26

• £0 - £250,000: 0%
• £250,001 - £925,000: 5%
• £925,001 - £1,500,000: 10%
• Over £1,500,000: 12%

First-Time Buyer Relief

First-time buyers get a better deal:

• £0 - £425,000: 0%
• £425,001 - £625,000: 5%
• Properties over £625,000 don't qualify for relief

Additional Property Surcharge

If you're buying a second home or buy-to-let property, you pay an extra 3% on top of the standard rates. Use our Stamp Duty Calculator to see exactly what you'll pay.

5. Council Tax

Council Tax is a local tax on residential properties that funds local services like rubbish collection, police, fire services, and local roads. The amount you pay depends on your property's valuation band and your local council.

Council Tax Bands

Properties are placed in bands A-H based on their 1991 value in England and Scotland (2003 value in Wales). Band D is the baseline, with other bands calculated as a proportion of Band D.

Discounts and Exemptions

• Single Person Discount: 25% off if you live alone
• Student Exemption: Full-time students don't pay council tax
• Disability Reduction: One band lower if property has features for disabled residents
• Empty Property: Discounts vary by council, some charge premiums for long-term empty homes

6. Capital Gains Tax (CGT)

Capital Gains Tax is charged on profits when you sell assets like shares, second properties, or business assets. Your main home is usually exempt.

CGT Rates 2025/26

For most assets (shares, funds, etc.):

• Basic rate taxpayers: 10%
• Higher/additional rate taxpayers: 20%

For residential property:

• Basic rate taxpayers: 18%
• Higher/additional rate taxpayers: 24%

Annual Exemption

You can make up to £6,000 in capital gains each year tax-free (reduced from £12,300 in previous years). Married couples can each use their allowance, effectively doubling it to £12,000.

7. Inheritance Tax (IHT)

Inheritance Tax is charged on your estate (property, money, and possessions) when you die. Most estates don't pay IHT because they're below the threshold or qualify for exemptions.

IHT Rates 2025/26

• Nil-rate band: £325,000 (tax-free)
• Residence nil-rate band: £175,000 extra if leaving main home to direct descendants
• Combined threshold: Up to £500,000 per person (£1 million for married couples)
• Tax rate: 40% on anything above the threshold

Exemptions

• Anything left to your spouse or civil partner is tax-free
• Gifts to charities are tax-free
• Gifts made more than 7 years before death are tax-free

8. VAT (Value Added Tax)

VAT is a consumption tax charged on most goods and services. As a consumer, you pay VAT on your purchases, but you don't need to file VAT returns unless you're self-employed with turnover over £90,000.

VAT Rates

• Standard rate: 20% (most goods and services)
• Reduced rate: 5% (energy bills, children's car seats, etc.)
• Zero rate: 0% (most food, children's clothes, books, newspapers)

9. Tax-Efficient Saving and Investing

The UK offers several tax-efficient ways to save and invest. Taking advantage of these can significantly reduce your tax bill.

ISAs (Individual Savings Accounts)

You can save or invest up to £20,000 per year in ISAs, and all interest, dividends, and capital gains are tax-free. Types include:

• Cash ISA: Tax-free savings account
• Stocks & Shares ISA: Tax-free investment account
• Lifetime ISA: 25% government bonus for first-time buyers or retirement (under 40 only)
• Innovative Finance ISA: Tax-free peer-to-peer lending

Pensions

Pension contributions receive tax relief at your marginal rate. If you're a higher-rate taxpayer, you get £40 tax relief for every £60 you contribute, making pensions one of the most tax-efficient investments available.

Other Allowances

• Personal Savings Allowance: £1,000 tax-free savings interest (basic rate) or £500 (higher rate)
• Dividend Allowance: £500 tax-free dividends per year
• Trading Allowance: £1,000 tax-free self-employment or property income

10. How to Reduce Your Tax Bill Legally

There are many legitimate ways to reduce your tax bill without breaking any rules.

Maximize Tax-Free Allowances

• Use your full £20,000 ISA allowance each year
• Contribute to your pension (especially if you're a higher-rate taxpayer)
• Use your £6,000 capital gains allowance before selling large investments
• Transfer assets to your spouse to use both allowances

Salary Sacrifice

Some employers offer salary sacrifice schemes where you give up salary in exchange for benefits like pension contributions, cycle-to-work schemes, or childcare vouchers. This reduces your taxable income and NI contributions.

Claim All Eligible Expenses

If you're self-employed or work from home, claim all legitimate business expenses. Employees can claim tax relief on professional subscriptions, uniforms, and tools required for work.

Marriage Allowance

If one partner earns less than £12,570 and the other is a basic-rate taxpayer, you can transfer £1,260 of personal allowance, saving up to £252 per year.

Conclusion

Understanding UK taxes helps you make better financial decisions and keep more of your hard-earned money. The key takeaways are:

• You pay both income tax and National Insurance on earnings
• The UK uses progressive tax rates—you don't pay the same rate on all your income
• Use tax-efficient accounts like ISAs and pensions to reduce your tax bill
• Stamp duty, capital gains tax, and inheritance tax affect major financial decisions
• There are many legal ways to reduce your tax bill

Use our calculators to understand exactly how much tax you'll pay on your income, property purchases, and loans.