UK Tax Thresholds Explained: Allowances, Limits & Bands

Income tax in the UK operates through a system of bands and thresholds. The Personal Allowance of £12,570 represents the amount you can earn tax-free each year. This threshold has been frozen since 2021 and, following the November 2025 Budget, remains frozen until 5 April 2031.

Once your income exceeds the Personal Allowance, you enter the Basic Rate band where you pay 20% tax on earnings between £12,571 and £50,270. The Higher Rate of 40% applies to income between £50,271 and £125,140. Income above £125,140 is taxed at the Additional Rate of 45%.

A critical cliff edge exists at £100,000. For every £2 you earn above this amount, you lose £1 of your Personal Allowance. This creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. At £125,140, your Personal Allowance is reduced to zero.

Scottish taxpayers face different rates and bands for 2026/27. The Starter Rate of 19% applies to income from £12,571 to £16,537. The Scottish Basic Rate of 20% applies from £16,538 to £29,526. The Intermediate Rate of 21% applies from £29,527 to £43,662. The Higher Rate of 42% runs from £43,663 to £75,000. The Advanced Rate of 45% applies from £75,001 to £125,140. The Top Rate of 48% applies to income above £125,140. The widening of the Starter and Basic rate bands means no Scottish taxpayer pays more income tax in 2026/27 than they did on the same income in 2025/26.

National Insurance contributions work alongside income tax but have their own set of thresholds. Employees pay Class 1 NI at 8% on earnings between the Primary Threshold of £12,570 and the Upper Earnings Limit of £50,270 per year. Above the Upper Earnings Limit, the rate drops to 2%.

Employers pay a separate contribution of 15% on all earnings above the Secondary Threshold, currently set at £5,000 per year. This employer contribution has no upper limit, making it a significant cost for businesses with higher-paid staff.

Self-employed individuals pay Class 4 NI at 6% on profits between £12,570 and £50,270, then 2% above that threshold. Class 2 contributions are £3.65 per week for 2026/27 (small profits threshold: £7,105).

The alignment of the Primary Threshold with the Personal Allowance at £12,570 means most employees begin paying both income tax and National Insurance at the same point. Combined with the Basic Rate of income tax, this creates an effective starting rate of 28% on earnings above the threshold.

The Dividend Allowance has been reduced significantly in recent years. For 2026/27, you can receive £500 in dividend income tax-free, down from £1,000 in 2023/24 and £2,000 in 2022/23. This reduction particularly affects company directors who pay themselves through dividends.

Dividends above the allowance are taxed at rates that depend on your income tax band. From 6 April 2026, basic rate taxpayers pay 10.75% on dividends (up from 8.75%), higher rate taxpayers pay 35.75% (up from 33.75%), and additional rate taxpayers pay 39.35%. These rates are lower than equivalent income tax rates because dividends are paid from company profits that have already been subject to Corporation Tax.

The Personal Savings Allowance allows basic rate taxpayers to earn £1,000 in savings interest tax-free, while higher rate taxpayers receive a £500 allowance. Additional rate taxpayers have no savings allowance. Interest earned within ISAs does not count against this limit.

A separate Starting Rate for Savings of 0% applies to the first £5,000 of savings income, but only if your non-savings income is below £17,570. For each pound of other income above the Personal Allowance, this band reduces by one pound.

Dividend tax rates have increased from 6 April 2026. The basic rate rose from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. The additional rate remains at 39.35%. The £500 dividend allowance is unchanged.

This affects anyone receiving dividends outside an ISA wrapper — including limited company directors and investors holding shares in a general investment account.

See how dividend changes affect your limited company pay →

The Capital Gains Tax Annual Exempt Amount has fallen dramatically from £12,300 in 2022/23 to just £3,000 in 2024/25 and 2026/27. This reduction means more people now pay CGT when selling assets such as shares, investment properties, or valuable possessions.

Gains above the £3,000 allowance are taxed at unified rates for 2026/27: 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers on all assets. The previous distinction between residential property and other assets was removed in October 2024.

Your main residence remains exempt from Capital Gains Tax under Principal Private Residence Relief, provided you have lived in it throughout your ownership. Transfers between spouses and civil partners are also exempt, which creates planning opportunities for married couples.

Losses can be carried forward indefinitely to offset against future gains, making record-keeping essential. Bed and ISA strategies, where you sell investments and immediately repurchase them within an ISA, can help crystallise gains within your annual allowance while sheltering future growth.

Crossing a tax threshold does not mean all your income is taxed at the higher rate. The UK system is progressive, meaning only the portion of income above each threshold faces the higher rate. Earning £51,000 does not push your entire salary into the 40% band, only the £730 above £50,270.

However, certain thresholds trigger additional consequences beyond the headline rate. Crossing £60,000 when you or your partner claims Child Benefit triggers the High Income Child Benefit Charge, effectively clawing back 1% of the benefit for every £200 earned above £60,000 until it is fully repaid at £80,000. The charge is based on the higher individual earner's income — the government's planned reform to base it on household income was not implemented.

The £100,000 threshold creates the stealth 60% tax trap through Personal Allowance withdrawal. Between £100,000 and £125,140, your effective marginal rate reaches 60% when combining the 40% higher rate with the loss of tax-free allowance. Pension contributions can reduce your adjusted net income below this threshold, restoring your Personal Allowance.

Understanding these thresholds helps with tax planning decisions. Salary sacrifice into pensions, timing of bonuses, and the structure of investment income can all be optimised around key thresholds to minimise your overall tax burden legally.