How Income Tax Works in the UK (2026-27): Bands, Allowances and Rates
In 2026-27 the UK Personal Allowance is £12,570 — income below that is tax-free. Above it you pay 20% (basic rate) up to £50,270 gross, 40% (higher rate) up to £125,140, then 45% (additional rate) beyond. Scottish taxpayers use six separate devolved bands ranging from 19% to 48%.
The Personal Allowance: your tax-free income
Every UK resident is entitled to a Personal Allowance — an amount of income you can earn before paying any income tax. For the 2026-27 tax year (6 April 2026 to 5 April 2027) the standard Personal Allowance is £12,570. This figure has been frozen at £12,570 since 2021-22 and HMRC has confirmed it will remain at this level until at least 5 April 2028. The Personal Allowance is not a fixed right for higher earners. Once your Adjusted Net Income (ANI) — broadly your total income minus certain deductions such as pension contributions made under a Net Pay Arrangement — exceeds £100,000, the allowance tapers. For every £2 of ANI above £100,000, £1 of Personal Allowance is withdrawn. The allowance reaches zero at an ANI of £125,140. This taper creates the notorious 60% effective marginal rate band for rUK taxpayers, discussed in detail below. Children, non-residents, and those with certain tax codes may have a different allowance. People who are blind or registered severely sight-impaired may also qualify for the Blind Person's Allowance on top of the standard figure. Always check your tax code notice from HMRC if you are uncertain which allowance applies to you.
The three rUK income tax bands for 2026-27
For taxpayers in England, Wales, and Northern Ireland — collectively referred to as rUK (rest of UK) — income tax is charged in three bands applied to taxable income (ANI minus Personal Allowance): Basic rate: 20% on taxable income up to £37,700. With a full Personal Allowance, this covers gross earnings from £12,571 to £50,270. Higher rate: 40% on taxable income from £37,701 to £112,570. With a full Personal Allowance, this covers gross earnings from £50,271 to £125,140. Additional rate: 45% on taxable income above £112,570, corresponding to gross earnings above £125,140 (when the Personal Allowance has been fully withdrawn). These band boundaries are set in taxable income terms (after deducting the Personal Allowance). The gross income equivalents assume the standard full £12,570 allowance applies. If your allowance is reduced — for example because your income falls in the taper zone — the effective gross boundaries shift accordingly. The Basic Rate Limit of £37,700 is also the boundary used for pension higher-rate relief, making it relevant beyond income tax alone. HMRC confirms both the £12,570 Personal Allowance and the £37,700 Basic Rate Limit are frozen through to 5 April 2028.
Scottish income tax: six devolved bands
Scotland has had powers to set its own income tax rates and bands since 2017. Scottish taxpayers — those whose main home is in Scotland, regardless of where their employer is based — pay income tax under six bands instead of three. Starter rate: 19% on taxable income up to £3,967 (gross earnings £12,571 to £16,537). Basic rate: 20% on taxable income from £3,968 to £16,956 (gross £16,538 to £29,526). Intermediate rate: 21% on taxable income from £16,957 to £31,092 (gross £29,527 to £43,662). Higher rate: 42% on taxable income from £31,093 to £62,430 (gross £43,663 to £75,000). Advanced rate: 45% on taxable income from £62,431 to £112,570 (gross £75,001 to £125,140). Top rate: 48% on taxable income above £112,570 (gross above £125,140). The Personal Allowance and taper rules are identical to rUK — both are reserved matters set by the UK Government. National Insurance is also not devolved, so Scottish and rUK employees pay exactly the same NI contributions. The practical effect is that Scottish taxpayers earning above roughly £29,500 gross pay more income tax than their rUK counterparts; the gap widens significantly at higher incomes. At £50,000 gross, a Scottish taxpayer pays approximately £1,496 more per year in income tax than an equivalent rUK taxpayer. Always verify your tax code: Scottish taxpayers receive codes with an S prefix (for example S1257L).
The £100,000 Personal Allowance taper and the 60% trap
The withdrawal of the Personal Allowance between £100,000 and £125,140 ANI creates one of the highest effective marginal tax rates in the UK system. For rUK taxpayers, each additional £1 of income in this range incurs 40% higher-rate tax on that pound, plus an effective 20% from the allowance withdrawal (every £2 of income withdraws £1 of allowance, which costs 40p in tax). The combined effective marginal rate is 60%. For Scottish taxpayers in the same range, the advanced rate of 45% applies alongside the same allowance withdrawal, giving an effective marginal rate of 67.5%. The single most effective strategy for taxpayers in this zone is to make pension contributions that reduce their ANI below £100,000, thereby restoring the full Personal Allowance and cutting the tax bill substantially. Net Pay Arrangement pension contributions reduce ANI directly; relief-at-source contributions do not reduce ANI in the same way. Salary sacrifice pension contributions, which reduce contractual pay before tax, also reduce ANI and additionally reduce National Insurance. This is a YMYL-sensitive planning area. Individuals in the taper zone are strongly advised to seek guidance from a qualified tax adviser before making pension or other structuring decisions.
Dividends, savings interest and other income sources
Employment income and self-employment profits are the most common sources of income, but the UK system taxes several other types at different rates. Dividend income: The first £500 of dividend income is covered by the Dividend Allowance and is not taxed. Above that, dividends are taxed at 10.75% (basic rate taxpayers), 35.75% (higher rate), or 39.35% (additional rate) for 2026-27. Note that dividend rates apply at UK level even for Scottish taxpayers — the Scottish Parliament does not set dividend tax rates. Savings interest: The Personal Savings Allowance allows basic rate taxpayers to earn up to £1,000 of savings interest tax-free, and higher rate taxpayers up to £500. Additional rate taxpayers have no savings allowance. There is also a starting rate for savings of 0% on up to £5,000 of savings income, available only if non-savings income does not exceed £17,570 (the Personal Allowance plus the £5,000 band). All these figures are sourced from HMRC official publications for 2026-27. Tax law is complex, and the interaction of multiple income sources — particularly when crossing band boundaries — can be counterintuitive. This guide is informational; always verify your personal position with a qualified tax professional.
FAQ
When does the UK tax year run?
The UK tax year runs from 6 April to 5 April the following calendar year. The 2026-27 tax year therefore runs from 6 April 2026 to 5 April 2027. This unusual start date dates back to calendar reforms in 1752. PAYE employees are taxed in real time through the year via payroll; self-employed people file a Self Assessment return after the tax year ends, with a deadline of 31 January following the end of the tax year.
How do I know whether Scottish or rUK income tax rates apply to me?
Scottish income tax rates apply if your main home — the place where you live the most — is in Scotland. Your employer's location, where you work, or where you were born are irrelevant. HMRC determines your status and issues a tax code with an S prefix if you are a Scottish taxpayer. If you move to or from Scotland mid-year, the rates for the whole tax year are based on your situation at the end of the tax year (5 April).
What is the 60% effective marginal rate trap and how do I avoid it?
If your Adjusted Net Income falls between £100,000 and £125,140, your Personal Allowance is progressively withdrawn at £1 for every £2 of income above £100,000. This withdrawal, on top of the 40% higher rate, creates an effective marginal rate of 60% for rUK taxpayers (67.5% for Scottish taxpayers). The most common way to avoid it is to make pension contributions — particularly via salary sacrifice or a Net Pay Arrangement — to bring ANI below £100,000. A tax adviser can model the precise saving for your circumstances.
Are pension contributions tax-deductible and how much can I contribute?
Pension contributions generally attract income tax relief: contributions reduce your taxable income (via a Net Pay Arrangement) or are topped up by basic-rate tax relief added by the pension provider (relief at source). The annual allowance for pension contributions is £60,000 for 2026-27, or 100% of your earnings if lower. If you have flexibly accessed a defined contribution pension, the Money Purchase Annual Allowance of £10,000 applies instead. Pension contributions do not reduce National Insurance (except where made through salary sacrifice). Tax advice should be sought if your income is above £200,000, as a tapered annual allowance may apply.
⚠️ Informational estimate, not tax advice. Payroll software may differ in edge cases. Verify with a professional.