UK Income Tax Explained
Income tax is the primary tax on earnings in the United Kingdom, collected by HM Revenue & Customs (HMRC) through the PAYE system for employees, or through Self Assessment for the self-employed. The UK uses a progressive tax system, meaning higher earners pay a higher percentage of their income in tax — but crucially, only on the portion of income that falls within each band, not on their entire income.
The Personal Allowance
Every UK taxpayer is entitled to a Personal Allowance — an amount of income they can earn completely free of income tax. For 2024/25, this is £12,570. The allowance has been frozen at this level since 2021/22 and is set to remain frozen until 2027/28, meaning that as wages rise with inflation, more people are pulled into higher tax bands — a phenomenon known as fiscal drag.
The Personal Allowance is gradually withdrawn for those earning over £100,000, reducing by £1 for every £2 of income above this threshold. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140, making this one of the most punishing income ranges in the UK tax system. Pension contributions can be an effective way to reduce income into a lower band.
Scottish Income Tax
Scotland has its own income tax rates and bands, set by the Scottish Parliament. For 2024/25, Scotland has six bands ranging from the Starter Rate of 19% up to the Top Rate of 48% on income above £125,140. Scottish taxpayers generally pay more income tax than those in the rest of the UK on the same salary, though they benefit from other policy differences such as free prescriptions and no university tuition fees.
Frequently Asked Questions
What is the difference between effective and marginal tax rate?
Your effective rate is the average percentage of your total income paid in tax. Your marginal rate is the rate you pay on your next pound of income. Understanding both helps with financial planning — for example, knowing your marginal rate tells you how much tax you would save by making an additional pension contribution.
Do I need to file a Self Assessment tax return?
You must file a Self Assessment return if you are self-employed, a company director, earn over £100,000, have untaxed income over £2,500, or have capital gains to declare. Employees whose tax is fully collected through PAYE generally do not need to file a return.
How do I get a tax refund if I have overpaid?
If you believe you have overpaid tax, you can claim a refund through your Personal Tax Account at gov.uk, by contacting HMRC directly, or through your Self Assessment return. HMRC will usually issue a P800 tax calculation at the end of the tax year if they believe you have overpaid.