How does UK income tax actually work?
UK income tax works in layers. You don’t pay one rate on your whole income — each band applies only to the portion of income that falls within it. You fill from the bottom up:
- The Personal Allowance (£12,570) is tax-free. Income up to this amount is not subject to income tax.
- Basic rate (20%) applies to the next £37,700 — income from £12,571 to £50,270.
- Higher rate (40%) applies above £50,270, up to £125,140.
- Additional rate (45%) applies above £125,140. At this point the Personal Allowance has already been withdrawn entirely.
Each band is a layer, not a label. A higher-rate taxpayer still pays 0% on the first £12,570 and 20% on the next £37,700. Only the income above £50,270 is taxed at 40%.
What are the 2026/27 bands?
2026/27 income tax bands — England, Wales & Northern Ireland
Personal Allowance
£0 – £12,570
Basic rate
£12,571 – £50,270
Higher rate
£50,271 – £125,140
Additional rate
Above £125,140
These are taxable income bands, not gross salary bands. Pension salary sacrifice reduces the income these bands are applied to.
What’s the difference between average rate and marginal rate?
Your average rate is the percentage of your total gross income that goes in income tax. Your marginal rate is the rate that applies to the next £1 you earn. These two numbers can be very different — and only one of them tells you what a pay rise, bonus or RSU vest actually delivers.
Here’s a concrete example using the calculator’s engine:
- Gross salary: £67,500
- Pension sacrifice: 8% (£5,400)
- Adjusted income: £62,100
- Student loan: Plan 2
The tax calculation on £62,100 adjusted income:
- £12,570 at 0% (Personal Allowance) = £0
- £37,700 at 20% (basic rate) = £7,540
- £11,830 at 40% (higher rate) = £4,732
- Total annual income tax: £12,272
Divide that by the gross salary and the average effective rate is 18.2%. That might feel reassuring — most of the income isn’t taxed at 40% at all.
But this person is already a higher-rate taxpayer. Their adjusted income sits above £50,270, which means the next pound they earn falls straight into the 40% band. The average looks low; the marginal rate is not.
Add employee NI at 2% (above the upper earnings limit of £50,270, the rate drops from 8% to 2%) and Plan 2 student loan at 9%, and the total marginal rate is 51%: 40% income tax + 2% NI + 9% student loan.
What does a £5,000 pay rise actually deliver?
Taking the same person, here is what happens if their adjusted income rises from £62,100 to £67,100 — an increase of £5,000:
£5,000 pay rise — what actually arrives
- Income tax at 40%£2,000
- Employee NI at 2%£100
- Student loan — Plan 2 at 9%£450
- Total deductions£2,550
- Net you keep£2,450
- Effective deduction rate51%
The gap between the gross raise (£5,000) and what actually arrives (£2,450) is exactly what the marginal rate predicts. The average rate of 18.2% wouldn’t have told you any of this.
This is why the marginal rate is the number that matters when evaluating a pay rise, negotiating compensation, or thinking through what an RSU vest will actually deliver. The average rate describes the past; the marginal rate describes the next pound.
Why does pension sacrifice change which band you sit in?
The bands apply to adjusted income — your gross salary minus pension sacrifice — not your gross salary. That distinction matters most near the boundary between basic and higher rate.
Consider someone earning £55,000 with a 10% pension sacrifice. Their adjusted income is £49,500 — just below the higher-rate threshold of £50,270. On that income, the marginal rate is 20% income tax + 8% NI (still within the main NI band) = 28% before any student loan. Without sacrifice, their salary itself would already be a higher-rate income, and the marginal rate on anything above £50,270 would be 40% income tax + 2% NI instead.
The band you sit in depends not just on your salary, but on your pension contribution. For more on how this works in practice, see the salary sacrifice pension guide.
What happens near the £100,000 threshold?
Above £100,000 of adjusted income, the Personal Allowance begins to be withdrawn — £1 for every £2 earned over the threshold. This creates an effective marginal rate well above 40% on income in that range, because both the direct tax on the extra income and the tax on the lost allowance stack together. It disappears entirely at £125,140.
The full mechanics — and what pension sacrifice can do about it — are covered in the Personal Allowance taper guide.
The informed decision
Knowing your marginal rate — not just your band — means you can evaluate what a pay rise, bonus or RSU vest actually delivers in take-home, rather than the gross figure. It also means you can understand why pension sacrifice is more valuable than its headline percentage suggests: every pound of sacrifice that keeps you in a lower band saves tax at the higher rate, not just the rate you’re sacrificing into.