Ultimate Handbook to Income Tax Rules & Laws

Understanding how income tax is calculated helps individuals make better financial decisions and ensures they know what to expect from their pay.

Many people find the process confusing, especially with the different tax bands and allowances.

Carefully breaking down a real-life example makes the concept clearer.

In this article, income tax is explained in simple terms. If you’re wondering, “What income tax do I pay?” a simple example shows how income tax is worked out for someone in the UK.

Who Pays Income Tax?

Income tax is paid by individuals who have taxable income above a certain threshold set by the government.

This includes people employed, self-employed, and those receiving pensions.

The following groups commonly pay income tax:

• Employees who earn wages or a salary.
• Self-employed individuals, such as freelancers or business owners.
• Pension recipients, if their pension income exceeds the personal allowance.
• People who earn interest, dividends, or rental income above set limits.

There are some types of income that are not taxed, such as certain benefits and low-value savings interest, depending on individual circumstances.

The government sets a personal allowance. This is the amount each person can earn before paying any income tax.

Incomes above the personal allowance are taxed at rates that depend on how much an individual earns. 

The 10% of taxpayers with the highest incomes contribute over 60% of the total income tax collected in the UK.

This demonstrates the progressive nature of the tax system; those with higher incomes pay a larger share.

What Is the Tax Year?

The tax year is a fixed 12-month period set by the government for the purpose of assessing and collecting income tax. In the UK, the tax year starts on 6 April and ends on 5 April of the following year.

All income received during this period is used to determine a person’s total taxable income. This applies to salaries, pensions, investments, and other taxable sources.

The key points about the UK tax year are:

• Start date: 6 April
• End date: 5 April
• Length: 12 months

Employers, pension providers, and self-employed individuals must all report income and submit related documents based on these dates. This includes the submission of tax returns and payment of any tax due.

Deadlines for self-assessment tax returns and other tax obligations are tied to the end of the tax year. Understanding the exact dates helps individuals and businesses plan effectively and avoid penalties.

The tax year structure is unique to the UK, as many other countries use a calendar year for tax purposes. The choice of these dates dates back to historical changes in the calendar system.

How to Calculate How Much Income Tax You’ll Have to Pay

If you want to calculate the amount of income tax you’ll have to pay, you can follow a few simple steps.

Step 1: Determine Total Taxable Income

Your total taxable income includes salary, wages, pensions, self-employment profits, and any other income sources after deductions like personal allowance and tax reliefs.

Step 2: Subtract the Personal Allowance 

For most people, the standard Personal Allowance for the tax year 2025/26 is £12,570.

Income below this threshold isn’t taxed.

Step 3: Apply the Appropriate Tax Bands

Apply the appropriate tax bands to the remaining income.

The bands for 2025/26 (excluding Scotland) are:

Step 4: Calculate Income Tax for Each Band

For example, if taxable income is £60,000:

• First £37,700 (after Personal Allowance) at 20%
• Next £9,730 at 40%
• Any remaining over £125,140 at 45%

Step 5: Add Any National Insurance Contributions if Required

For employees and the self-employed, Class 1 and Class 4 NICs often apply, affecting take-home pay.

A useful tip to remember is that online income tax calculators are provided by GOV.UK or MoneySavingExpert. These can help estimate income tax and National Insurance for most scenarios.

Key Takeaways

Income tax in the UK is calculated based on an individual's taxable income, which includes wages, self-employment profits, pensions, and other taxable sources. 

The personal allowance of £12,570 for the 2025/26 tax year allows individuals to earn up to that amount without paying tax, while income above this is taxed in bands: 20% for earnings up to £50,270, 40% for income between £50,271 and £125,140, and 45% for earnings over £125,140. 

National Insurance contributions are also often required, affecting take-home pay. 

Understanding tax bands, allowances, and deductions is essential for accurate tax payments and financial planning, as income tax rules can change annually.