How does UK income tax work?

Last Modified 16th of February 2021

Every person in the UK gets a certain amount of tax-free allowance each tax year. This means that you don’t pay tax on this amount of your earnings. The tax year, beginning every April, starts with the government determining the rates. This will then be used to calculate your standard tax free allowance (also known as your personal allowance).

If you earn less than the threshold, you won’t pay any tax. You pay tax on anything above the amount and the percentage you pay will depend on your income level.

The three income tax levels are basic rate, higher tax rate and additional tax rate at 20%, 40% and 50%, respectively.

There are also a number of increases available to your personal allowance depending on age and circumstance. Here’s a quick breakdown of the extras:

    • Aged 65-74. If you are between these ages, then your personal allowance rises each year if the tax-free allowance rises
    • Aged 75+. If you are over 75 then you get an extra increase on your tax-free allowance
    • Blind persons allowance. If you are registered as blind, then an additional amount of money is added to your total personal allowance amount.

Other tax free allowances are available for married couple over a certain age, and some people are exempt from making National Insurance contributions, which also increases their net income.

There are of course exceptions to these income tax rules, which is why using an income tax calculator is a good way to check what your actual personal allowance is. If your income level is over £100,000 (or over £25,400 for people aged 65+) then your personal allowance can actually be decreased by £1 for every £2 over the limit you are.

Another thing to take into consideration when trying to work out your income tax, NI and net pay is whether or not you pay into a pension, have childcare vouchers through your employer, or earn enough to repay your student loan.