Guide · 5 minute read

How is my salary actually taxed in the UK?

Your salary is taxed in layers: the first £12,570 is tax free, then income tax takes 20%, 40% or 45% of each slice above that, and National Insurance takes a separate cut on top. Nobody pays one flat rate on the whole lot, which is why your payslip never matches a quick mental sum.

The personal allowance comes first

For the 2026/27 tax year, the first £12,570 of your income is covered by the personal allowance and pays no income tax at all. Whatever you earn, that slice is yours.

Everything above the allowance is "taxable income", and that is what the bands apply to. On a £40,000 salary in England, Wales or Northern Ireland, taxable income is £27,430, not £40,000. Scotland uses its own bands (a 19% starter rate up to a 48% top rate), but the allowance works the same way.

The bands tax slices, not your whole salary

A common fear is that a pay rise into a higher band makes you worse off. It cannot, because each rate only applies to the slice of income inside its band:

• 20% basic rate on the first £37,700 of taxable income
• 40% higher rate from there up to £125,140 of total income
• 45% additional rate above £125,140

On £40,000 all your taxable income sits in the basic rate band, so income tax is £5,486. On £60,000 the first £37,700 of taxable income is taxed at 20% (£7,540) and the remaining £9,730 at 40% (£3,892), a total of £11,432. The 40% rate never touches the money below the threshold.

National Insurance is a second, separate tax

Employee National Insurance runs alongside income tax with its own thresholds: 8% on earnings between £12,570 and £50,270, then 2% above that. It is calculated on your gross pay, before any pension contribution under a standard net pay scheme.

So the £40,000 earner pays £2,194 in NI on top of their income tax, leaving take-home of about £32,320, or roughly £2,693 a month. The £60,000 earner pays £3,211 in NI, leaving about £45,357. You can check your own numbers in seconds with the take-home pay calculator.

The order of operations matters: pension contributions usually come off your pay before income tax is worked out, then the personal allowance is applied, then the bands, while NI and any student loan repayments are calculated separately on your gross pay.

Marginal rate versus effective rate

Two numbers describe your tax position and people constantly mix them up. Your marginal rate is what you pay on the next pound you earn. Your effective rate is the share of your whole salary that actually goes in deductions.

On £60,000 the marginal rate is 42% (40% income tax plus 2% NI), but the effective rate is only about 24%, because the allowance and the basic rate band drag the average down. Marginal rate tells you what a pay rise or a pension contribution is really worth; effective rate tells you what your salary is really worth.

The £100,000 trap: a hidden 62% rate

Above £100,000, the personal allowance is withdrawn at £1 for every £2 of extra income, disappearing entirely at £125,140. Each extra pound in that window is taxed at 40% itself and drags another 50p of previously tax-free income into the 40% band, an effective 60% income tax rate, plus 2% NI: 62% all in.

Concretely, a rise from £100,000 to £110,000 lifts take-home from about £68,557 to £72,357. Of the £10,000 rise, you keep £3,800.

The standard fix is to put the income above £100,000 into your pension, which restores the allowance and turns a 62% tax hit into retirement savings. Salary sacrifice does this most efficiently because it saves NI as well; the salary sacrifice calculator shows the exact effect at your salary.

Common questions

Can a pay rise ever leave me with less take-home pay?

Not from income tax bands alone, because higher rates only apply to the slice above each threshold. Cliff edges do exist elsewhere: losing Child Benefit, free childcare hours, or the personal allowance taper above £100,000 can make a rise worth far less than it looks.

Why is my tax code 1257L?

It encodes your personal allowance: 1257 means £12,570 of tax-free income, and L means the standard allowance applies. Different letters or numbers usually mean adjustments for benefits in kind, a second job, or owed tax being collected through your salary.

Are Scottish income tax rates different?

Yes. Scotland sets its own bands for 2026/27, running from a 19% starter rate through 20%, 21%, 42% and 45% to a 48% top rate. National Insurance is UK-wide, so only the income tax side changes.

Do pension contributions reduce my tax?

Yes. In a standard workplace scheme they come off your pay before income tax is calculated, so a £100 contribution costs a basic rate taxpayer about £80 and a higher rate taxpayer about £60. Salary sacrifice goes further by also avoiding 8% or 2% NI.

What is the highest tax rate anyone pays on salary in the UK?

On paper it is 45% income tax plus 2% NI above £125,140, or 47%. In practice the worst zone is £100,000 to £125,140, where the personal allowance taper pushes the effective marginal rate to 62% (and slightly higher in Scotland).

Guidance and education, not regulated financial advice.