Income tax contributes about 28% a year to the UK government’s tax revenues, far more than any other form of taxation. Without it the public services we all rely on such as the NHS, schools, pensions and benefits, and the police would be unaffordable.
Most people pay income tax in the form of PAYE (pay as you earn), which is income tax taken off their pay by their employer. But other incomes are also taxable above certain thresholds.
Who pays income tax?
The government gives everyone a tax-free personal allowance of £12,570, which can be less or more depending on what other allowances the taxpayer claims. As well as earnings, people have to pay income tax on:
- Profits from self-employment
- Rent if they are a landlord
- Interest and dividends from savings and investments
Income tax rates
Income tax is levied at three rates.
Rates of income tax (2025/26):
- £0 to £12,570 – 0%
- £12,571 to £50,270 – Basic rate: 20%
- £50,271 to £125,140 – Higher rate: 40%
- Over £125,140 – Additional rate: 45%
The key thing to remember is that people pay tax at different rates on different portions of their income. A 45% taxpayer does not pay that rate on all of their income.
Example: someone earning £60,000 per year pays:
- 0% on £12,570 (personal allowance)
- 20% on £37,700 (£12,570–£50,270)
- 40% on £9,730 (£50,270–£60,000)
Allowances
The main allowances people can claim are:
- Personal allowance: £12,570
- Personal savings allowance: £1,000/£500
- Marriage allowance: £1,260
- Dividend tax allowance: £500
- Property allowance: £1,000
- Trading allowance: £1,000
Personal allowance
This has been frozen at £12,570 until at least April 2028. Because wages have risen, more people are now pushed into higher-rate tax even without earning more in real terms.
If your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 earned over £100,000. At £125,140 or more, you lose it entirely. Everyone gets a personal allowance, including pensioners, students, and children.
Personal savings allowance
This sits on top of any money in ISAs.
- £1,000 allowance for basic-rate taxpayers
- £500 for higher-rate taxpayers
- No allowance for additional-rate (45%) taxpayers
Non-taxpayers can earn up to £18,570 in interest tax-free.
Married couple’s and marriage allowances
- Married couple’s allowance – only for couples where one or both were born before 6 April 1935.
- Marriage allowance – allows a spouse earning £12,570 or less to transfer 10% of their allowance to the higher-earning partner.
Dividend allowance
Only the first £500 of dividend income is tax-free.
- 8.75% for basic-rate taxpayers
- 33.75% for higher-rate taxpayers
Blind person’s allowance
Those registered blind or with severe visual impairment receive an additional allowance of £3,130 per year. Unused allowance can be transferred to a spouse or civil partner.
Trading and property allowances
- Trading allowance: £1,000 tax-free trading income for the self-employed (cannot be claimed alongside actual expenses).
- Property allowance: £1,000 tax-free rental income, or actual expenses if higher.
Progressive and regressive taxation
Income tax is progressive—it takes a larger share from higher earners.
- Salary of £150,000: £53,700 in income tax (over 33%)
- Salary of £20,000: about £1,490 (around 7.5%)
VAT and duties (e.g., alcohol, tobacco, fuel) are regressive since they take the same rate from everyone, hitting lower earners harder.
Who pays the most income tax?
In 2021–22, income tax contributions by income group were:
- Top 1%: 29.6%
- 90–99th percentile: 31.3%
- 50–90th percentile: 29.8%
- Bottom 50%: 9.3%
This shows the UK income tax system is highly progressive, with wealthier individuals contributing a large share.
A (very) short history of income tax
Income tax was first introduced in Britain by William Pitt the Younger in 1799 to finance war with France. It was abolished in 1802, reinstated in 1803, and removed again in 1816—only to return permanently in 1842 under Sir Robert Peel to fund government spending and war costs.
Rates have risen over time, but Chancellor Rachel Reeves has pledged not to increase them during the current parliament. Given income tax brought in an estimated £268 billion in 2023–24, even a small rate change would have a major impact.
If you would like advice about any aspect of tax or your business, please contact Finsbury Robinson. We are a full-service tax, accountancy, and business advisory firm. Call us on 020 8858 4303 or email info@finsburyrobinson.co.uk.
Angus Walker 01.08.2025
