Tax needn’t be taxing!

In this guide, we break down the essentials of UK tax and national insurance for employees living in England, Wales and Northern Ireland. Learn about income tax bands, national insurance contributions and tax-free allowances, which let you keep more of your money. If you live in Scotland, the tax bands and rates are different, details of which are at the bottom of this page. If you are self-employed the rules work a bit differently, just click the link below for more details:

Marginal Tax system

The UK has a marginal tax system with different tax band thresholds and tax rates. A marginal tax system means that when an increase in your income pushes you into a higher tax band, you don’t pay the higher rate of tax on all of your income. With a marginal system you only pay the higher rate of tax on the portion of your income that falls within the higher tax band. In England, Wales and Northern Ireland, there are three marginal tax bands, the basic rate band, higher rate band and the additional rate band:

• Basic rate tax band – 20% tax is payable on income between £12,570 and £50,270. The first £12,570 is tax-free as this falls within the tax-free personal allowance of £12,570 with the remaining £37,700 taxed at 20%.
• Higher rate tax band – 40% tax is payable on income between £50,270 and £125,140.
• Additional rate tax band – 45% tax is payable on income above £125,140.
• The UK tax year runs from 6th April to 5th April of the following year.
• Tax for employees in the UK is also referred to as PAYE or pay as you earn.

Tax Allowances

Various tax allowances let individuals earn a certain amount of income tax-free. The main allowances you need to be aware of are:

• Personal allowance – You can earn up to £12,570 tax-free during the tax year.
• Personal savings allowance (PSA) – £1,000 annual interest on savings is tax-free for basic rate taxpayers. Higher rate taxpayers have an allowance of £500. Additional rate taxpayers have no allowance.
• Dividend allowance – You can earn £500 dividend income tax-free during a tax year. Dividends are taxed at 8.75%, 33.75% and 39.35% for the respective tax bands.

If interest income pushes you into a higher tax bracket when added to your other income, you will lose part of the savings allowance. The dividend allowance is fully available regardless of your total income. The personal allowance reduces when your adjusted net income exceeds £100,000 by £1 for every £2 earned over £100,000. You lose the personal allowance once your income exceeds £125,140.

Tax on employment income – PAYE (pay as you earn)

To illustrate tax on employment income, assuming an annual salary of £25,000, you’ll pay 20% tax on £12,430 (£25,000 – £12,570 personal allowance), which is £2,486 annually or £207 per month.

Income above £50,270 is taxed at the higher rate of 40%. On a salary of £60,000, the first £12,570 is tax-free, and the next £37,700 (£50,270 minus £12,570) is taxed at 20%. The remaining £9,730 which falls in the higher rate tax band (£60,000 minus £50,270) is taxed at 40%.

The following example shows the tax calculation on an annual salary of £60,000:

National insurance (NI) on employment income

Employees with NI category letter A pay national insurance of 8% on their income up to £50,270. Income above this amount incurs NI at 2%. Apprentices under the age of 25 have a national insurance category letter H and employees under 21 years the letter M.

National insurance is payable on earnings over the primary monthly threshold of £1,048. If you earn less than £1,048 a month you won’t pay NI contributions.

On an annual salary of £25,000, national insurance is £83 a month and is calculated as follows:

• Deduct the NI threshold of £1,048 from the monthly pay of £2,083
• This leaves £1,035 of income that is subject to 8% NI
• £1,035 x 8% = £83 a month of national insurance

Higher National Insurance threshold example

On an annual salary of £60,000, or £5,000 per month, national insurance is £267 a month. This is slightly more complicated to calculate, as there are two earnings thresholds to consider in this calculation. Income above the upper secondary NI threshold rate of £4,189, incurs national insurance of 2%. In this example, NI is calculated as follows:

• Deduct the primary threshold of £1,048 from the upper secondary threshold of £4,189
• This leaves income of £3,141 that is subject to NI contributions of 8%
• £3,141 multiplied by 8% is £251
• Income above £4,189 pays NI at 2%
• Deduct £4,189 from the salary of £5,000 which is £811
• £811 multiplied by 2% is £16
• Add both contributions of £251 and £16, to get the total NI due, which is £267
• Note the upper secondary threshold is an annual equivalent of £50,270 matching the upper limit for the basic rate tax band. Income above £50,270 pays NI at 2%.

The tables below illustrate the national insurance calculations on salaries of £60,000 and £25,000:

Scottish tax bands

Scotland has different tax bands and rates to England and Wales. The chart below details the bands and percentage tax rates.

Other resources:

Income Tax in Scotland: Current rates – GOV.UK