The UK tax system is one of the most complex in the world, with dozens of taxes, allowances, and reliefs. But for most people, the two taxes that matter are income tax and National Insurance (NI) — together, they take around 20–30% of your earnings. The average UK worker earning £35,000 pays £6,681 per year in income tax and NI (19% effective rate), while a higher earner on £80,000 pays £23,432 (29% effective rate). But the system is progressive — the more you earn, the higher your tax rate. Here is everything you need to know about the UK tax system — how it works, what you pay, and where the money goes.
Income Tax
Income tax is a tax on your earnings (salary, bonuses, self-employment income, rental income, interest, dividends). It is the UK's biggest tax, raising £250 billion per year (2024–25).
The personal allowance
The personal allowance is the amount you can earn tax-free each year. In 2024–25, it is £12,570.
Everyone gets the personal allowance, but it is withdrawn for high earners. If you earn over £100,000, you lose £1 of allowance for every £2 earned, until it disappears entirely at £125,140.
This creates a 60% marginal tax rate for people earning £100,000–£125,140 (40% income tax + 20% from losing the allowance).
The tax bands (2024-25)
| Income | Tax rate | Tax paid |
|---|---|---|
| £0–£12,570 | 0% (personal allowance) | £0 |
| £12,571–£50,270 | 20% (basic rate) | Up to £7,540 |
| £50,271–£125,140 | 40% (higher rate) | Up to £29,948 |
| Over £125,140 | 45% (additional rate) | 45% on amount above £125,140 |
Scotland
Scotland has different income tax rates, set by the Scottish Parliament:
| Income | Tax rate |
|---|---|
| £0–£12,570 | 0% (personal allowance) |
| £12,571–£14,876 | 19% (starter rate) |
| £14,877–£26,561 | 20% (basic rate) |
| £26,562–£43,662 | 21% (intermediate rate) |
| £43,663–£75,000 | 42% (higher rate) |
| £75,001–£125,140 | 45% (advanced rate) |
| Over £125,140 | 48% (top rate) |
Scottish taxpayers pay more tax than the rest of the UK at most income levels.
Examples
Earning £25,000
- Personal allowance: £12,570 (tax-free)
- Taxable income: £25,000 - £12,570 = £12,430
- Tax: 20% × £12,430 = £2,486
Earning £50,000
- Personal allowance: £12,570 (tax-free)
- Taxable income: £50,000 - £12,570 = £37,430
- Tax: 20% × £37,430 = £7,486
Earning £100,000
- Personal allowance: £12,570 (tax-free)
- Taxable income: £100,000 - £12,570 = £87,430
- Tax: (20% × £37,700) + (40% × £49,730) = £7,540 + £19,892 = £27,432
National Insurance
National Insurance (NI) is a tax on earnings, originally designed to fund the state pension, NHS, and unemployment benefits. In practice, it goes into the same pot as income tax and funds general government spending.
NI is paid by employees, employers, and the self-employed.
Employee NI (2024-25)
| Earnings | NI rate |
|---|---|
| £0–£12,570 | 0% |
| £12,571–£50,270 | 8% |
| Over £50,270 | 2% |
NI is only paid on earnings (salary, wages, bonuses), not on other income (rental income, interest, dividends).
Examples
Earning £25,000
- NI-free: £12,570
- Taxable: £25,000 - £12,570 = £12,430
- NI: 8% × £12,430 = £994
Earning £50,000
- NI-free: £12,570
- Taxable: £50,000 - £12,570 = £37,430
- NI: 8% × £37,430 = £2,994
Earning £100,000
- NI-free: £12,570
- Band 1 (8%): £50,270 - £12,570 = £37,700 → 8% × £37,700 = £3,016
- Band 2 (2%): £100,000 - £50,270 = £49,730 → 2% × £49,730 = £995
- Total NI: £3,016 + £995 = £4,011
Employer NI
Employers also pay NI on your earnings (13.8% on earnings above £9,100 per year). This is not deducted from your salary, but it is part of the cost of employing you.
For example, if you earn £50,000, your employer pays an additional £5,643 in employer NI.
Total Tax Burden
Your total tax burden is income tax + employee NI.
| Salary | Income tax | NI | Total tax | Effective rate |
|---|---|---|---|---|
| £25,000 | £2,486 | £994 | £3,480 | 13.9% |
| £35,000 | £4,486 | £2,195 | £6,681 | 19.1% |
| £50,000 | £7,486 | £2,994 | £10,480 | 21.0% |
| £80,000 | £19,486 | £3,610 | £23,096 | 28.9% |
| £100,000 | £27,432 | £4,011 | £31,443 | 31.4% |
The effective tax rate (total tax as a percentage of income) rises with income, but not as steeply as the marginal rate (the rate on the last pound earned).
Other Taxes
VAT (Value Added Tax)
VAT is a tax on goods and services, charged at 20% (standard rate), 5% (reduced rate, e.g., energy), or 0% (zero rate, e.g., food, children's clothes).
VAT raises £170 billion per year, making it the UK's second-biggest tax after income tax.
Council tax
Council tax is a property tax charged by local councils, averaging £2,065 per year for a band D property in England (2024–25). See our guide to council tax for more.
Stamp duty
Stamp duty is a tax on property purchases, payable on homes over £250,000 (or £425,000 for first-time buyers). Rates range from 5% to 12% depending on the property price.
Capital gains tax (CGT)
CGT is a tax on profits from selling assets (property, shares, businesses). The rate is 10% or 20% depending on your income, with an annual allowance of £3,000 (2024–25).
Inheritance tax (IHT)
IHT is a tax on estates worth over £325,000 (or £500,000 if you leave your home to children), charged at 40% on the amount above the threshold.
Corporation tax
Corporation tax is a tax on company profits, charged at 25% (2024–25) for large companies and 19% for small companies (profits under £50,000).
Where Does the Money Go?
Total UK tax revenue is £1.1 trillion per year (2024–25). The biggest taxes are:
- Income tax: £250 billion (23%)
- National Insurance: £170 billion (15%)
- VAT: £170 billion (15%)
- Corporation tax: £100 billion (9%)
- Council tax: £40 billion (4%)
- Other taxes: £370 billion (34%)
The money is spent on:
- Health (NHS): £200 billion (18%)
- Pensions: £150 billion (14%)
- Education: £120 billion (11%)
- Defence: £60 billion (5%)
- Welfare: £300 billion (27%)
- Debt interest: £100 billion (9%)
- Other: £170 billion (16%)
How Tax Is Collected
PAYE (Pay As You Earn)
Most employees pay tax through PAYE, where your employer deducts tax and NI from your salary before you are paid. You receive a payslip showing your gross pay, deductions, and net pay.
Your employer sends the tax to HMRC (HM Revenue and Customs) on your behalf.
Self-assessment
If you are self-employed, have rental income, or earn over £100,000, you must complete a self-assessment tax return each year (by 31 January). You calculate your own tax and pay it in two instalments (31 January and 31 July).
Tax codes
Your tax code tells your employer how much tax to deduct. The standard code is 1257L (personal allowance £12,570). If your code is wrong, you may pay too much or too little tax.
Check your tax code on your payslip or at gov.uk/check-income-tax.
How to Reduce Your Tax Bill
1. Pension contributions
Pension contributions get tax relief at your marginal rate. If you are a basic-rate taxpayer (20%), a £100 pension contribution costs you £80. If you are a higher-rate taxpayer (40%), it costs you £60.
You can contribute up to £60,000 per year (or 100% of your earnings, whichever is lower) and get tax relief.
2. ISAs
ISAs (Individual Savings Accounts) are tax-free savings and investment accounts. You can save up to £20,000 per year in an ISA (2024–25), and all interest, dividends, and capital gains are tax-free.
3. Salary sacrifice
Salary sacrifice schemes let you give up part of your salary in exchange for benefits (pension contributions, childcare vouchers, cycle to work scheme). This reduces your taxable income and saves tax and NI.
4. Charitable donations
Donations to charity get tax relief through Gift Aid. The charity claims 25% on top of your donation, and higher-rate taxpayers can claim an additional 25% through their tax return.
5. Marriage allowance
If you earn less than the personal allowance (£12,570), you can transfer £1,260 of your allowance to your spouse or civil partner (if they are a basic-rate taxpayer), saving them £252 per year.
The Bottom Line
Income tax has three bands: 0% on first £12,570 (personal allowance), 20% on £12,571-£50,270 (basic rate), 40% on £50,271-£125,140 (higher rate), 45% above £125,140. National Insurance is 8% on earnings £12,570-£50,270, then 2% above £50,270, effectively adding to your tax burden. The average UK worker earning £35,000 pays £4,486 in income tax and £2,195 in NI (total £6,681, or 19% effective rate). The personal allowance is withdrawn for high earners — those earning £100,000-£125,140 face a 60% marginal rate due to allowance taper. Total UK tax revenue is £1.1 trillion per year (2024-25), with income tax (£250bn), NI (£170bn), and VAT (£170bn) the biggest sources. The UK tax system is complex, but the basics are simple: you pay income tax and NI on your earnings, with higher earners paying more. Use pension contributions, ISAs, and salary sacrifice to reduce your tax bill legally. Check your tax code, keep records, and file your tax return on time. The tax system funds the NHS, schools, pensions, and everything else the government does. It is not perfect, but it is how we pay for the society we want.