HMRC works out how much tax you owe by adding up your income for the tax year, taking off your Personal Allowance and any reliefs you qualify for, and then applying progressive tax rates to what’s left. For 2025/2026 (6 April 2025 to 5 April 2026), the standard tax-free Personal Allowance is £12,570, and income above that is taxed at rates starting at 20%.1GOV.UK. Income Tax Rates and Personal Allowances The mechanics of how HMRC calculates your tax then depend on whether it’s collected through PAYE from your wages or through a Self Assessment return you file yourself.
The Personal Allowance and Where It Disappears
Every calculation starts with the Personal Allowance. For 2025/2026 you can earn £12,570 before any income tax is due. The allowance has been frozen at this level since 2021, and the freeze is set to continue until at least April 2028.
If your adjusted net income goes above £100,000, the allowance starts tapering. You lose £1 of allowance for every £2 of income above the threshold.1GOV.UK. Income Tax Rates and Personal Allowances Between £100,000 and £125,140 this produces an effective marginal rate of 60%, because 40% tax applies to that income while the tax-free allowance is being withdrawn at the same time. By £125,140 the allowance is gone.
Reliefs reduce your taxable income before rates are applied. Pension contributions to registered schemes attract tax relief, Gift Aid donations effectively extend your basic rate band, and self-employed workers deduct legitimate business expenses from their trading profits.
Income Tax Bands for 2025/2026
England, Wales, and Northern Ireland
After the Personal Allowance comes off, HMRC taxes the remainder in slices:1GOV.UK. Income Tax Rates and Personal Allowances
- Basic rate of 20% on taxable income from £12,571 to £50,270
- Higher rate of 40% on taxable income from £50,271 to £125,140
- Additional rate of 45% on taxable income above £125,140
These bands apply to employment income, self-employment profits, rental income, and most other non-savings income. Savings interest and dividends run on separate tracks.
Scotland
Scottish taxpayers get the same £12,570 Personal Allowance and the same £100,000 tapering, but the Scottish Parliament sets the rates and bands above the allowance. For 2025/2026 there are six of them:2GOV.UK. Income Tax in Scotland – Current Rates
- Starter rate of 19% from £12,571 to £15,397
- Basic rate of 20% from £15,398 to £27,491
- Intermediate rate of 21% from £27,492 to £43,662
- Higher rate of 42% from £43,663 to £75,000
- Advanced rate of 45% from £75,001 to £125,140
- Top rate of 48% above £125,140
If Scottish rates apply to you, your tax code will carry an “S” prefix (such as S1257L) so your employer’s payroll deducts the right amount.
Savings, Dividends, and Capital Gains
Not all income is taxed at the standard rates, and the order in which the different types stack up affects which band each slice falls into.
Savings interest gets a Personal Savings Allowance. Basic rate taxpayers can earn £1,000 of interest tax-free, higher rate taxpayers £500, and additional rate taxpayers get nothing.3GOV.UK. Tax on Savings Interest – How Much Tax You Pay Interest above the allowance is taxed at your marginal rate.
Dividends have a separate £500 allowance for 2025/2026 and their own rates. Above the allowance, dividends are taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate.4GOV.UK. Check if You Have to Pay Tax on Dividends
Capital Gains Tax runs on its own calculation when you sell an asset that’s gone up in value. The annual exempt amount for 2025/2026 is £3,000. Gains above that are taxed at 18% for basic rate taxpayers and 24% for higher rate taxpayers, including on residential property.5GOV.UK. Capital Gains Tax – What You Pay It on, Rates and Allowances The rate depends on where your total taxable income and gains sit within the bands, so a large gain can push you from the lower rate into the higher one.
How PAYE Collects Tax From Your Wages
If you’re an employee, HMRC collects your tax in real time through Pay As You Earn, and most employees never need to file a return. The system runs on your tax code, which tells your employer how much of each pay packet is tax-free. The most common code for 2025/2026 is 1257L: the 1257 represents the £12,570 Personal Allowance divided by 10, and the L flags the standard allowance.6GOV.UK. Understanding Your Employees Tax Codes
Payroll software spreads your annual tax-free amount evenly across the year. Paid monthly, roughly £1,048 of each pay packet is tax-free and the rest is taxed at whatever rate applies to your income level.
Tax Code Adjustments
HMRC changes your code during the year when circumstances change. Taxable benefits (a company car, private medical insurance), tax owed from a previous year, or small amounts of untaxed income can all be handled by reducing the tax-free amount in your code. This is called coding out.
A £2,000 taxable benefit, for example, might drop your code from 1257L to 1057L so the extra tax comes off through payroll across the year. There are limits: HMRC can’t code out underpayments of £3,000 or more from a single year, and the adjustment can’t take more than 50% of your pay.7GOV.UK. PAYE Manual – PAYE12070 Anything larger has to be paid separately.
The P800 Reconciliation
PAYE is an estimation running through the year, so it doesn’t always finish the year on the exact right number. After the tax year ends, HMRC compares the tax deducted from your pay against what you actually owed on your full annual income, and issues the result as a P800 tax calculation, usually between June and November.
If you’ve overpaid, the P800 explains how to claim the refund, normally online or by cheque.8GOV.UK. Tax Overpayments and Underpayments – If Youre Due a Refund An underpayment of less than £3,000 is normally collected by adjusting your code for the next year and spreading the cost across 12 months.9GOV.UK. Tax Overpayments and Underpayments – If Your Tax Calculation Letter P800 Says You Owe Tax Underpayments of £3,000 or more have to be paid directly.
How Self Assessment Works
If PAYE can’t cover your full tax picture, you have to file a Self Assessment return. Registration is required if in the previous tax year you:10GOV.UK. Self Assessment Tax Returns – Who Must Send a Tax Return
- Traded as a sole trader and earned more than £1,000
- Were a partner in a business partnership
- Owed Capital Gains Tax on a disposal
- Received rental income, significant savings interest, foreign income, or other untaxed income
- Needed to pay the High Income Child Benefit Charge and don’t pay it through PAYE
Earning over £150,000 (previously £100,000) or having complex tax affairs can also trigger the requirement. First-time registrations must reach HMRC by 5 October after the end of the relevant tax year.
The Return and the SA302
Self Assessment puts the reporting job on you. The SA100 return, plus any supplementary pages for things like property, foreign earnings, or capital gains, captures your income, expenses, and reliefs.11GOV.UK. Complete Your Self Assessment Tax Return for the Last Tax Year Filing online produces an immediate provisional calculation covering income tax and, for the self-employed, Class 4 National Insurance.
Class 4 NICs run at 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270.12GOV.UK. Self-Employed National Insurance Rates Class 2 contributions of £3.50 per week are treated as paid automatically if profits exceed £6,845, which protects your NI record without any out-of-pocket cost.
Once HMRC processes the return, the official statement of what you owe is the SA302 tax calculation. It shows your total income, the allowances and reliefs applied, and the final figure for the year.13GOV.UK. Understand Your Self Assessment Tax Bill – Tax Calculation SA302 Mortgage lenders often ask self-employed applicants for the SA302 as proof of income.14GOV.UK. Get Your SA302 Tax Calculation Note that payments on account don’t appear on the SA302; they sit on your separate statement of account.
Payments on Account
If your Self Assessment bill is over £1,000 after taking off any tax already collected at source, HMRC asks you to make payments on account toward the following year. Each one is 50% of the current year’s income tax and Class 4 NIC liability. The first falls due on 31 January alongside the balancing payment for the previous year, and the second on 31 July.
You’re not required to make payments on account if at least 80% of your income tax and Class 4 NICs was already deducted at source. If your income drops, you can apply to reduce the payments, but if you underestimate, HMRC charges interest on the shortfall.
Deadlines and Penalties
For the 2024/2025 tax year the key Self Assessment dates are:15GOV.UK. Self Assessment Tax Returns – Deadlines
- 31 October 2025 for paper returns
- 31 January 2026 for online returns and payment of tax owed
- 31 July 2026 for the second payment on account
Late filing brings an automatic £100 penalty even if you owe no tax. After three months, daily penalties of £10 start accruing up to a maximum of £900. At six months, HMRC adds a charge of 5% of the tax due or £300, whichever is greater, and the same charge applies again at twelve months.16GOV.UK. Self Assessment Tax Returns – Penalties A return a full year late can cost more than £1,600 in penalties before interest on unpaid tax. Filing on time when you can’t pay in full avoids the filing penalties.
If the Calculation Looks Wrong
Whether you receive a P800 or an SA302, check the figures against your own records first. For employees, that means the P60 your employer gives you at year end and any P45s from jobs you left during the year. For Self Assessment filers, it means confirming the income, expenses, and reliefs on the SA302 match what you submitted.
You have 12 months from the statutory filing date to amend a Self Assessment return.17GOV.UK. HMRC Self Assessment Manual – SAM124165 For a 2024/2025 return, that runs to 31 January 2027. Online filers can amend directly through their Government Gateway account and the system recalculates automatically. Past the deadline, you have to contact HMRC in writing to request a correction.
If you think a P800 is wrong, contact HMRC with the details and any supporting documents. For formal decisions, such as an HMRC determination or the outcome of an enquiry, you have 30 days from the decision letter to appeal or accept a review.18GOV.UK. Disagree With a Tax Decision You can ask for an internal review by a different HMRC officer, or appeal directly to the First-tier Tribunal.19GOV.UK. Disagree With a Tax Decision or Penalty Missing the 30-day window doesn’t automatically close things off, but you’ll need to explain the delay, and HMRC isn’t obliged to accept the reason.