How much tax do I pay in the UK

How much tax do I pay in the UK?

How much tax you pay in the UK depends on how you earn your money, how much you earn, where you live, and whether you are employed, self-employed, a landlord, a company director, or running a limited company. For most people, the main taxes to understand are Income Tax and National Insurance. For business owners, freelancers, contractors, and side-hustlers, you may also need to think about VAT, Corporation Tax, dividend tax, expenses, payments on account, and keeping accurate records throughout the year.

The UK tax system can feel complicated because there is not one single flat rate that applies to all of your income. Instead, income is usually taxed in layers. You may get a tax-free Personal Allowance first, then pay one rate on the next slice of income, a higher rate on the slice after that, and so on. This means that earning £60,000 does not mean all of your income is taxed at 40%. It means only the portion above the higher-rate threshold is taxed at that rate, after allowances and adjustments.

This guide explains the main UK tax rules for individuals and small businesses in clear, practical language. It is especially useful if you invoice clients, work for yourself, run a small business, or want to understand what to set aside for tax. If you use invoice24, you can keep your invoices, payments, customer details, expenses, VAT records, and financial summaries organised in one place, which makes it easier to estimate what you owe and avoid surprises when tax deadlines arrive.

The main types of UK tax you may pay

The taxes you pay depend on your circumstances. An employee usually pays Income Tax and employee National Insurance through PAYE. A sole trader usually pays Income Tax and Class 4 National Insurance through Self Assessment. A limited company pays Corporation Tax on its profits, while directors and shareholders may also pay Income Tax, National Insurance, and dividend tax depending on how they take money out of the company.

The most common UK taxes to understand are:

• Income Tax on salary, self-employed profits, rental income, pensions, savings interest, and some other income.
• National Insurance, which applies differently to employees, employers, and self-employed people.
• VAT, which applies to many business sales once your taxable turnover is above the registration threshold, or earlier if you register voluntarily.
• Corporation Tax, which limited companies pay on taxable profits.
• Dividend tax, which can apply when company shareholders receive dividends.
• Capital Gains Tax, which may apply when you sell certain assets for a profit.

Not everyone pays every tax. For example, a salaried employee with no side income may only need to understand PAYE deductions. A freelance designer may need to understand invoices, expenses, Self Assessment, Income Tax, National Insurance, and possibly VAT. A limited company consultant may need to understand Corporation Tax, salary, dividends, VAT, and bookkeeping.

Income Tax in England, Wales, and Northern Ireland

For the 2026 to 2027 tax year, the standard Personal Allowance is £12,570. This is the amount of income most people can receive before paying Income Tax. After that, Income Tax is charged in bands. In England, Wales, and Northern Ireland, the main rates are 20%, 40%, and 45%.

Band	Taxable income after allowances	Income Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

These bands are easiest to understand if you think of your income as being divided into slices. The first slice is covered by your Personal Allowance, assuming you are entitled to the full amount. The next slice is taxed at the basic rate. Only the slice above the higher-rate threshold is taxed at the higher rate. If your income goes above the additional-rate threshold, only the slice above that level is taxed at the additional rate.

For example, if you earn £40,000 from employment in England and have the standard Personal Allowance, your first £12,570 is tax-free. The remaining £27,430 is taxed at 20%, creating an Income Tax bill of £5,486 before National Insurance, pension deductions, student loans, or other adjustments.

Income Tax in Scotland

Scotland has different Income Tax bands for most types of earned income, including employment income, self-employed profits, pension income, and rental income. The UK-wide Personal Allowance still usually applies, but the Scottish tax bands are different once income rises above the allowance.

Scottish band	Taxable income after allowances	Income Tax rate
Personal Allowance	Up to £12,570	0%
Starter rate	Up to £3,967 above the allowance	19%
Basic rate	£3,968 to £16,956 above the allowance	20%
Intermediate rate	£16,957 to £31,092 above the allowance	21%
Higher rate	£31,093 to £62,430 above the allowance	42%
Advanced rate	£62,431 to £125,140 above the allowance	45%
Top rate	Over £125,140	48%

Scottish rates can make take-home pay different from the same salary elsewhere in the UK. However, National Insurance is not devolved in the same way, so employees and self-employed people in Scotland generally use the same National Insurance structure as the rest of the UK.

What happens to your Personal Allowance over £100,000?

The Personal Allowance is reduced when your adjusted net income is over £100,000. For every £2 of adjusted net income above £100,000, your Personal Allowance is reduced by £1. Once income reaches £125,140, the standard Personal Allowance is normally reduced to zero.

This creates a very high effective tax rate between £100,000 and £125,140. In England, Wales, and Northern Ireland, income in this band is usually taxed at 40%, but the loss of Personal Allowance creates extra tax. For every £2 earned, £1 of tax-free allowance disappears, so another £1 becomes taxable. This is why many people describe this income range as having an effective 60% Income Tax rate before National Insurance is considered.

Pension contributions and certain other deductions can reduce adjusted net income, so they may help preserve some or all of the Personal Allowance. This is an area where personalised advice can be valuable, especially for higher earners, company directors, and people with multiple sources of income.

National Insurance for employees

National Insurance is separate from Income Tax. If you are an employee, your employer normally deducts employee National Insurance from your wages through payroll. For many employees, Class 1 National Insurance is charged at 8% on earnings between the primary threshold and upper earnings limit, then 2% on earnings above the upper earnings limit.

Employee earnings band	Employee National Insurance rate
Up to £12,570 per year	0%
£12,571 to £50,270 per year	8%
Over £50,270 per year	2%

National Insurance is one reason your total deductions are higher than your Income Tax alone. If you earn £50,000 as an employee, your Income Tax may be £7,486 based on the standard allowance and English, Welsh, or Northern Irish bands, but you may also pay employee National Insurance of about £2,994.40. That makes the combined Income Tax and employee National Insurance about £10,480.40 before considering pension contributions, student loans, salary sacrifice, benefits, or other deductions.

Example tax estimates for employees

The examples below use the standard Personal Allowance and the England, Wales, and Northern Ireland Income Tax bands. They show approximate Income Tax and employee National Insurance only. They do not include pension contributions, student loans, postgraduate loans, workplace benefits, tax code changes, Scottish rates, salary sacrifice, bonuses, or other adjustments.

Annual salary	Approximate Income Tax	Approximate employee NI	Total tax and NI	Approximate take-home before other deductions
£30,000	£3,486.00	£1,394.40	£4,880.40	£25,119.60
£40,000	£5,486.00	£2,194.40	£7,680.40	£32,319.60
£50,000	£7,486.00	£2,994.40	£10,480.40	£39,519.60
£70,000	£15,432.00	£3,410.60	£18,842.60	£51,157.40
£100,000	£27,432.00	£4,010.60	£31,442.60	£68,557.40
£125,140	£37,488.00	£4,513.40	£42,001.40	£83,138.60
£150,000	£48,675.00	£5,010.60	£53,685.60	£96,314.40

These examples are useful for a broad sense of how much tax you pay, but your real payslip may differ. A different tax code can change how much tax is collected during the year. Pension contributions can reduce taxable income or National Insurance depending on the scheme. Student loan deductions are based on the relevant repayment plan. Benefits in kind, bonuses, overtime, and company cars can also affect deductions.

How much tax do self-employed people pay?

If you are self-employed as a sole trader, you pay tax on your profit, not your total sales. Profit means your business income minus allowable business expenses. For example, if you invoice clients £55,000 during the year and have £8,000 of allowable expenses, your taxable profit starts from £47,000, before any other tax adjustments.

This is why good record keeping matters. If you do not track your expenses properly, you may overestimate your profit and pay more tax than necessary. With invoice24, you can create and send invoices, record when clients pay, manage customer details, organise invoice numbers, track business expenses, and keep a clearer view of your income during the year. That makes it easier to estimate your taxable profit before Self Assessment season.

Self-employed people usually pay Income Tax using the same income tax bands that apply to their country of residence. They also pay Class 4 National Insurance on profits above the relevant threshold. For 2026 to 2027, Class 4 National Insurance is charged at 6% on profits between £12,570 and £50,270, then 2% on profits above £50,270. Class 2 National Insurance is generally treated as paid for people with profits above the small profits threshold, and voluntary Class 2 may be relevant in some cases to protect entitlement to certain benefits.

Self-employed tax examples

Here are simple examples for sole traders in England, Wales, or Northern Ireland with the standard Personal Allowance. These examples show approximate Income Tax and Class 4 National Insurance. They do not include student loans, payments on account, pension relief, losses, Scottish rates, or other adjustments.

Annual self-employed profit	Approximate Income Tax	Approximate Class 4 NI	Total tax and NI
£20,000	£1,486.00	£445.80	£1,931.80
£30,000	£3,486.00	£1,045.80	£4,531.80
£40,000	£5,486.00	£1,645.80	£7,131.80
£60,000	£11,432.00	£2,456.60	£13,888.60

A common mistake is to set aside money based on sales rather than profit, or to forget National Insurance and payments on account. Many sole traders set aside a percentage of every paid invoice into a separate tax savings account. The right percentage depends on your profit level, expenses, other income, and whether you are in the basic-rate, higher-rate, or additional-rate band.

Payments on account for Self Assessment

If you complete a Self Assessment tax return, you may need to make payments on account. These are advance payments towards your next tax bill. They are usually due in two instalments: one by 31 January and one by 31 July. Each payment is normally based on half of your previous year’s Income Tax and Class 4 National Insurance bill, although the rules depend on your circumstances.

Payments on account can surprise new freelancers and sole traders. For example, if your first Self Assessment bill is £6,000 and payments on account apply, you may need to pay that £6,000 plus an additional £3,000 towards the next tax year by 31 January. Then another £3,000 may be due by 31 July. This does not mean you are being taxed twice; it means HMRC is collecting some of next year’s estimated bill in advance.

Using invoice24 throughout the year can help because you can monitor invoices issued, invoices paid, overdue amounts, expenses, and overall business income. Instead of waiting until January to discover your profit, you can keep a running picture of your likely tax position.

How VAT affects what you charge

VAT is different from Income Tax. It is a tax on supplies of goods and services, and it affects how much you charge customers and what you report to HMRC. If your taxable turnover goes above the VAT registration threshold, you generally need to register for VAT. You can also register voluntarily before reaching the threshold if it makes sense for your business.

The UK VAT registration threshold is £90,000 of taxable turnover. Taxable turnover is not the same as profit. It is the total value of sales that are not VAT-exempt. This means a business with £92,000 of sales and £60,000 of expenses may still need to register for VAT because the threshold is based on turnover, not profit.

The standard VAT rate is 20%. Some goods and services are charged at 5% or 0%, and some are exempt or outside the scope of VAT. Once registered, you usually add VAT to your taxable sales, issue VAT invoices, keep VAT records, submit VAT returns, and pay HMRC the difference between VAT charged on sales and VAT reclaimable on eligible purchases.

For example, if you sell a service for £1,000 plus VAT, your customer pays £1,200. The extra £200 is not your income in the same way as your fee. It is VAT you collect and may need to pay to HMRC after deducting any VAT you can reclaim on your own business purchases.

Invoice24 is helpful for VAT-registered businesses because accurate invoices are essential. Your invoices should show the correct customer information, invoice date, invoice number, description, net amount, VAT rate, VAT amount, and gross total where relevant. Keeping this consistent reduces mistakes and saves time when preparing VAT returns.

Corporation Tax for limited companies

If you run a limited company, the company pays Corporation Tax on its taxable profits. Company profit is broadly income minus allowable business expenses, salary costs, employer costs, and other deductible items. Corporation Tax is not the same as the personal tax you may pay as a director or shareholder.

For companies with profits of £50,000 or less, the small profits rate is 19%. For companies with profits over £250,000, the main rate is 25%. Companies with profits between £50,000 and £250,000 may be entitled to marginal relief, which creates a gradual increase in the effective Corporation Tax rate between the small profits rate and the main rate.

A company with £40,000 of taxable profit would usually be looking at Corporation Tax of £7,600 at 19%, before any special adjustments. A company with £300,000 of taxable profit would usually be in the 25% main rate, meaning Corporation Tax of £75,000. For profits between £50,000 and £250,000, the calculation is more detailed because of marginal relief.

Limited company owners also need to think about how they personally take money from the company. Salary is usually deductible for Corporation Tax purposes but may create PAYE and National Insurance costs. Dividends are paid from post-tax company profits and may create dividend tax for the shareholder. Director’s loans, benefits, pension contributions, and expenses all have their own rules.

Dividend tax

Dividends are common for limited company shareholders. They are not treated the same as salary because dividends are paid from profits after Corporation Tax. Individuals have a dividend allowance, and dividend income above that allowance is taxed at dividend tax rates depending on which tax band it falls into.

For 2026 to 2027, the dividend allowance is £500. Dividend tax rates are 10.75% for dividend income in the basic-rate band, 35.75% for dividend income in the higher-rate band, and 39.35% for dividend income in the additional-rate band.

For example, if you receive £5,000 in dividends and have not used your dividend allowance, the first £500 may be covered by the allowance and the remaining £4,500 may be taxable. The rate depends on your other income and tax band. A director-shareholder who takes both salary and dividends should look at the combined position, not each item separately.

What expenses reduce your tax bill?

Allowable expenses can reduce taxable profit for sole traders and limited companies. The basic idea is that expenses must be incurred wholly and exclusively for business purposes. Common examples include software, materials, office costs, professional fees, business insurance, advertising, bank charges, training, postage, travel for business journeys, and some home office costs.

Not every payment from your business account is automatically tax-deductible. Personal spending, client entertainment, fines, and some other costs may not be allowable. Mixed-use costs, such as phone bills or home internet, may need to be split between business and personal use. Equipment may be handled under capital allowance rules rather than treated like a simple day-to-day expense.

This is another area where organised records matter. If you keep invoices, receipts, expense notes, and payment records in order, it is easier to claim what you are entitled to and answer questions later. invoice24 helps by keeping your invoicing and business records tidy, so you can see what came in, what is unpaid, and what expenses relate to your work.

How to estimate how much tax to set aside

A simple approach for freelancers and sole traders is to estimate your profit regularly, not just once a year. Start with your invoices paid or expected to be paid. Subtract your allowable expenses. Then apply the Income Tax and National Insurance rules to the estimated profit. If you have employment income as well, include it because your side income may be taxed on top of your salary and could fall into a higher tax band.

Many basic-rate sole traders set aside around 20% to 30% of profit for tax and National Insurance, but that is only a rough habit, not a rule. Higher-rate taxpayers may need to set aside more. VAT-registered businesses should also keep VAT money separate, because VAT collected from customers is not the same as profit. If you have payments on account, you may need to reserve cash for both the balancing payment and the advance payment towards the next tax year.

For limited companies, it can help to keep separate pots for Corporation Tax, VAT, PAYE, and owner withdrawals. The company’s tax is not the same as the director’s personal tax. Taking too much out of the company without planning can lead to cash flow problems when Corporation Tax or VAT is due.

How invoices affect your tax records

Invoices are one of the foundations of good tax records. They show what you charged, who you charged, when you charged it, what services or goods were supplied, and whether VAT was added. If a client pays late, your invoice records also help you chase payment and manage cash flow.

A good invoice should include your business name, customer details, invoice number, invoice date, payment terms, description of work, amount charged, VAT details if applicable, and payment instructions. Consistent invoice numbering is important because gaps and duplicates can create confusion when reviewing your records.

invoice24 is designed for this kind of practical business admin. You can create professional invoices, send them to clients, keep customer information organised, record payment status, manage overdue invoices, and keep your paperwork clearer for tax time. For businesses that invoice regularly, features such as reusable customer records, invoice templates, recurring invoices, payment tracking, and reports can save hours over the year.

Tax if you have both employment and self-employed income

Many people have more than one source of income. You might have a full-time job and freelance on evenings or weekends. You might be employed but also rent out a property. You might run a small limited company while receiving a salary elsewhere. In these cases, your tax is based on your total taxable income, not each source in isolation.

For example, if your salary is £45,000 and your freelance profit is £15,000, you do not treat the freelance profit as if it starts from zero. Your salary has already used your Personal Allowance and much of your basic-rate band. Some of your freelance profit may therefore fall into the higher-rate band. You may also pay Class 4 National Insurance on self-employed profits if you are a sole trader.

This is why people with side income can be surprised by their Self Assessment bill. The side income may be taxed at 40% rather than 20% if your employment income has already taken you near or above the higher-rate threshold. Keeping your freelance invoices and expenses in invoice24 can help you estimate this earlier, instead of discovering it only when your tax return is prepared.

Tax codes and PAYE

If you are employed, your tax code tells your employer how much tax-free income to give you through payroll. The common tax code 1257L usually reflects the standard Personal Allowance. However, your code can change if you have benefits, underpaid tax from earlier years, multiple jobs, pension income, taxable expenses, or other adjustments.

PAYE aims to collect the right tax during the year, but it is not perfect. If your income changes, you receive a bonus, you start a second job, or you have untaxed income, you may pay too much or too little during the year. A tax code issue does not usually change how much tax you ultimately owe, but it can change when the tax is collected.

If you have both PAYE employment and self-employed income, your employment tax code may not collect tax on your business profit unless HMRC adjusts it. In many cases, you will report the extra income through Self Assessment and pay the tax separately.

Common reasons your tax bill is higher than expected

There are several common reasons people underestimate their UK tax bill. The first is forgetting National Insurance. Income Tax is only part of the picture for employees and sole traders. The second is looking at turnover instead of profit, especially for VAT. The third is failing to account for payments on account under Self Assessment.

Another common reason is having multiple income sources. A side hustle may be taxed at a higher rate if your main job already uses your allowance and basic-rate band. Company directors can also underestimate tax by looking only at Corporation Tax and forgetting personal tax on salary or dividends.

Late invoices and unpaid invoices can also create confusion. Depending on how you prepare your accounts, income may be recorded when invoiced rather than when paid. Good systems help you see what has been issued, what has been paid, and what remains outstanding. invoice24 gives small businesses and freelancers a clearer view of invoices and payments, which is essential for managing both cash flow and tax planning.

How to reduce tax legally

Reducing tax legally is about using the rules properly, not hiding income. Common ways to reduce taxable income include claiming allowable expenses, contributing to a pension, using available allowances, keeping accurate mileage records, reviewing your business structure, and planning the timing of income and costs where appropriate.

If you are self-employed, claiming all legitimate business expenses can make a meaningful difference. If you use your home for business, you may be able to claim a reasonable amount for home working. If you travel for business, you may be able to claim mileage or actual travel costs depending on the situation. If you buy equipment for your business, capital allowance rules may help reduce taxable profit.

If you run a limited company, tax planning may involve salary, dividends, employer pension contributions, timing of dividends, equipment purchases, and whether the company structure still suits your level of profit and risk. There is no single best answer for everyone, so it is worth getting advice as your income grows or your situation becomes more complex.

Why good bookkeeping makes tax easier

Tax becomes much easier when your records are up to date. If you leave everything until the deadline, you may spend hours searching for invoices, checking bank statements, finding receipts, and trying to remember which payments were business-related. This increases the risk of mistakes and can make your tax bill feel more stressful than it needs to be.

Good bookkeeping means recording income, tracking expenses, reconciling payments, keeping invoice numbers consistent, storing customer information, monitoring overdue invoices, and knowing whether you are approaching important thresholds such as the VAT registration threshold. It also helps you make better business decisions because you can see which clients pay on time, which services are profitable, and how much cash you should reserve for tax.

invoice24 is built to support this everyday admin for small businesses, freelancers, contractors, and sole traders. Because it is a free invoice app, it can be especially useful when you want a simple way to create professional invoices and stay organised without adding another large cost to your business. The more consistently you use it, the easier it becomes to understand your income, manage payments, and prepare for tax deadlines.

So, how much tax do you pay in the UK?

There is no single answer because UK tax depends on your income level, location, employment status, business structure, allowances, deductions, and other income. As a rough guide, an employee in England, Wales, or Northern Ireland with a standard tax code pays no Income Tax on the first £12,570, 20% on the next slice up to £50,270, 40% on income up to £125,140, and 45% above that. Employee National Insurance is usually added on top at 8% on earnings between £12,570 and £50,270, then 2% above that.

A sole trader pays Income Tax on taxable profit, plus Class 4 National Insurance on profits above the threshold. A limited company pays Corporation Tax on company profit, and the owner may also pay personal tax on salary, dividends, or other withdrawals. VAT may apply once taxable turnover passes the registration threshold, and it must be managed separately from profit.

The best way to stay in control is to keep accurate records throughout the year, estimate your tax regularly, set money aside as invoices are paid, and review your position before deadlines arrive. With invoice24, you can create professional invoices, track payments, manage customers, record expenses, handle VAT details, monitor overdue invoices, and keep the key information you need in one place. That makes it easier to answer the question “how much tax do I pay?” with confidence, rather than guesswork.