Understanding income tax is fundamental to managing your finances effectively. Many people pay more than they need to simply because they are unaware of the allowances and reliefs available to them.

📋 Key points
  • The personal allowance
  • The tax bands
  • National Insurance contributions
  • Legal ways to reduce your income tax bill

The personal allowance

Every UK adult has a personal allowance — the amount of income you can earn each year before paying any income tax. For 2026/27 the personal allowance remains at £12,570. Income above this threshold is taxed according to the rates below.

The tax bands

Basic rate tax of 20% applies to income between £12,571 and £50,270. Higher rate tax of 40% applies to income between £50,271 and £125,140. Additional rate tax of 45% applies to income above £125,140.

The personal allowance is tapered for people earning above £100,000 — you lose £1 of allowance for every £2 earned above this threshold, creating an effective 60% marginal tax rate on income between £100,000 and £125,140.

National Insurance contributions

As well as income tax, most employees pay National Insurance contributions. The main rate for employees is 8% on earnings between £12,570 and £50,270, and 2% on earnings above £50,270.

Legal ways to reduce your income tax bill

Pension contributions are the most powerful tool for reducing income tax. Contributions receive tax relief at your marginal rate — basic rate taxpayers get 20% relief, higher rate taxpayers get 40%. Contributing to a pension can also reduce your income back below key thresholds such as £100,000.

Marriage allowance allows one spouse to transfer up to £1,260 of their unused personal allowance to their partner, saving the higher earner up to £252 per year. This applies where one spouse earns below the personal allowance.

Salary sacrifice arrangements — where you give up salary in exchange for employer pension contributions or benefits such as childcare vouchers or cycle to work schemes — reduce your taxable income and National Insurance.

Bottom line

Understanding your income tax position and taking advantage of available allowances and reliefs can save you hundreds or thousands of pounds each year. Pension contributions are the single most powerful tool for most people. Consider speaking to an accountant if your finances are complex.