Income tax: five things you need to know

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The majority of UK adults pay income tax. But are you familiar with how it works? Here are five things you need to know.

1) It’s not just salaries and wages that are taxed

Income tax is a tax that most people need to pay on, well, their ‘income’! So you’d usually pay income tax on your salary or wages from employment, and the tax would usually be taken automatically via your employer.

But other things count as income too. For example, you might need to pay income tax on some state benefits, money you take from a pension plan, rental income, and more. You can check GOV.UK to find out what is and isn’t taxable. 

2) Most people can earn some income without paying income tax

There’s something called the ‘personal allowance’, which is an amount of income you can have in a tax year that you don’t need to pay tax on. For most people, it’s £12,570. 

So if your yearly income is £30,000, only £17,430 will be subject to income tax. And if your income is below your personal allowance, you usually have no income tax to pay. 

Not everyone’s personal allowance is the same. If you earn more than £100,000, your personal allowance gets smaller, reducing with every £1 you earn over £100,000. You can find more information on GOV.UK.

3) You don’t pay the same rate on all your income

Earn more than your personal allowance? How much tax you pay is decided by your tax band. If your income is:

• £12,571 to £50,270, you pay tax at the basic rate, which is 20%
• £50,271 to £125,140, you pay tax at the higher rate, which is 40%
• Over £125,140, you pay tax at the additional rate, which is 45%

You won’t pay income tax at the same rate on every penny you earn. Let’s say your income is £60,000:

• £12,570 would be free from tax
• You’d pay 20% on £37,700 (£50,270 - £12,570 = £37,700)
• You’d only pay 40% on £9,730 (£60,000 - £50,270 = £9,730)

Tax can be different depending on where you live in the UK. Tax rates and bands are different in Scotland.

4) Income tax applies to self-employed people – and sometimes ‘side hustles’

If you’re self-employed, you’ll normally still get the personal allowance for your yearly income. 

You usually need to pay income tax on your trading profits – which is money you have left over from your work after you’ve taken off business-related expenses. Alternatively, if you decide not to deduct business expenses, you have the option of claiming something called the ‘trading allowance’. This can let you earn £1,000 in trading income (usually income from providing goods or services) without needing to pay tax. You may also be able to claim a £1,000 ‘property allowance’ if you get income from land or property.  

There’s a lot to think about when it comes to tax and self-employment. To learn more, check MoneyHelper.

If you earn over £1,000 from self-employment, you need to let the government know. If there’s tax to pay, you’ll usually pay it via a self-assessment tax return.

Or you might have a job or activity you do outside your primary job – often called a ‘side hustle’. For example, some people consider themselves to have a side hustle if they sell clothes on online marketplaces, or rent out their driveway. Usually, you need to be earning more than £1,000 from these types of things before tax applies to that money. If you do, you’ll need to tell the government and potentially pay tax. You can check whether you need to declare your side-hustle income on GOV.UK.

5) You’ll likely still need to pay income tax in retirement

Money you take from your pension plans can be subject to income tax.

You can usually take 25% from each of your pension plans tax free (£268,275 is the maximum that most people can take tax free across all their plans). The rest of the money may be subject to income tax when you take it.

The State Pension is also taxable. Currently, the full new State Pension gives a person £11,973 yearly. This is less than the personal allowance – so if it’s your only income, there’s no income tax to pay. But if you’ve got other income that takes you over your personal allowance, income tax could apply. 

Imagine you get £11,973 from the State Pension and you take £5,000 of taxable money from a pension plan. Your total income for the year is over the personal allowance by £4,403, so you’ll pay tax on this amount. It’ll usually be deducted from your pension savings; tax doesn’t usually get deducted from the State Pension itself. 

To find out more about tax in retirement – and why you might need to pay emergency tax on pension plan withdrawals – you can check MoneyHelper.

Remember...

This article is just a quick introduction to income tax and how it might impact you. But remember, there are other taxes that you may need to pay, and National Insurance. Keep an eye on MoneyPlus for more tax articles!

 

The information here is based on our understanding April 2025 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.