Complete UK Income Tax Guide 2026/27 — HMRC Rates & Deductions

The current tax year runs from 6 April 2026 to 5 April 2027. Whether you're a PAYE employee, self-employed, or an investor, understanding these rules can save thousands of pounds.

Personal Allowance & Tax Bands

The personal allowance—the amount you can earn tax-free—remains at £12,570 for 2026/27. It is withdrawn by £1 for every £2 of income above £100,000, so it is gone entirely at £125,140. Income between those two figures carries an effective marginal rate of 60%.

Example: Earning £60,000

• Tax-free: £12,570
• Taxable income: £47,430
• 20% on the first £37,700 = £7,540
• 40% on the remaining £9,730 = £3,892
• Tax due: £11,432

National Insurance Contributions

Most employees pay National Insurance at 8% on earnings between £12,570 and £50,270. Earnings above £50,270 are taxed at 2%.

Key threshold: £12,570 (same as personal allowance)

Self-employed and freelancers pay contributions via self-assessment.

Tax-Advantaged Savings

Personal Savings Allowance

• Basic rate taxpayers: £1,000 interest tax-free
• Higher rate taxpayers: £500 tax-free
• Additional rate: No allowance

ISAs & Tax-Free Investing

• £20,000/year is a single combined allowance across all your adult ISAs, not one per type
• Stocks & Shares ISA: all growth and dividends tax-free, nothing to report
• Cash ISA: shares the same £20,000, no tax on interest
• Lifetime ISA: open between 18 and 39, £4,000/year (inside the £20,000), 25% government bonus up to £1,000/year
• Junior ISA: children under 18, £9,000/year — a separate allowance that does not touch your own £20,000

Pensions & Retirement

• Personal allowance: Unused allowance can't carry back, but pensions use relief at source
• Relief at source: Basic rate (20%) relief auto-applied on pension contributions
• Annual limit: £60,000 (tapered for very high earners)
• Lifetime allowance: abolished from 6 April 2024 — but a £268,275 cap on tax-free lump sums replaced it

Dividend Allowance & Tax

• Dividend allowance: £500/year (tax-free) — cut from £1,000 in 2023/24 and £2,000 before that
• Basic rate taxpayers: 10.75% on dividends above the allowance (2026/27; it was 8.75% up to 5 April 2026)
• Higher rate: 35.75% (was 33.75%)
• Additional rate: 39.35% (unchanged)

Capital Gains Tax

• Annual exemption: £3,000 (2026/27, unchanged from 2024/25)
• CGT is banded, not flat. Deduct the exemption from your gains, then stack what is left on top of your taxable income:
  • the part that still fits inside the basic-rate band (the first £37,700 of taxable income) is charged at 18%
  • everything above it is charged at 24%
• These rates apply to every asset class — shares, funds, crypto and residential property alike. The old 10%/20% pair, and the separate higher rate for residential property, both ended on 29 October 2024.
• Business Asset Disposal Relief charges 18% on up to £1,000,000 of lifetime qualifying business gains for disposals from 6 April 2026 (14% in 2025/26, 10% on or before 5 April 2025).

Key difference: capital gains are taxed separately from income, but they are stacked on top of it, so your income determines which CGT band the gain falls into.

Self-Employed & Freelance Tax

Profit Calculation

Turnover – Business Expenses = Net Profit → Taxable Income

Deductible expenses:

• Office supplies
• Equipment (capital allowance)
• Professional services (accounting, legal)
• Subscriptions & training
• Home office proportion (rent, utilities, internet)
• Vehicle costs
• Travel & meals

Payments on Account

If your self-employment income exceeds the £1,000 trading allowance you need to tell HMRC — use the GOV.UK "check if you need to send a Self Assessment tax return" tool for your exact position. Once you are in Self Assessment, tax is normally collected in two instalments on account plus a balancing payment, not quarterly:

• 31 January — first payment on account (plus the balancing payment for the previous year)
• 31 July — second payment on account
• Final balance due by the following 31 January

Marriage Allowance

Married couples/civil partners can transfer unused allowance to spouse:

• Transferor earns £12,570 or less
• Recipient earns £12,570 – £50,270
• Benefit: Up to £252/year tax saving

Investment & Rental Income

Property Rental

• Rental income taxed as earned income at your marginal rate
• Mortgage interest relief: Restricted to a basic-rate (20%) tax credit
• The 10% wear and tear allowance no longer exists — it was withdrawn in April 2016 and replaced by replacement of domestic items relief, which gives relief on what you actually spend replacing furniture and appliances. The separate furnished holiday lettings regime was also abolished from 6 April 2025, so holiday lets are now taxed like any other property business.
• Capital gains on property sale: subject to CGT at 18%/24% depending on your income band (principal private residence relief available on your own home). A gain on UK residential property must be reported and the tax paid within 60 days of completion, separately from the tax return.

Buy-to-Let Mortgage Interest

Full interest deduction was phased out between 2017 and 2020 and has been gone since April 2020. Relief is now a 20% tax credit on finance costs, which is worth less than a deduction to higher- and additional-rate landlords. Some investors use corporate structures for this reason, but incorporating an existing portfolio is itself a disposal for CGT and can trigger stamp duty.

Tax Credits & Allowances

• Marriage Allowance: Up to £252/year (non-working spouse)
• Personal savings allowance: See above
• Trading allowance: £1,000 for self-employed (auto-exclusion)
• Gift Aid (charitable): Basic rate relief auto-applied; higher earners can claim additional relief on tax return

Year-End Planning Checklist

• Maximize ISA contributions (£20,000)
• Use capital loss harvesting to offset gains
• Claim all business expenses before tax year-end
• Consider tax-loss harvesting in non-ISA investments
• Spread investment disposals across years if possible
• Contribute to pension before 5 April deadline for relief at source
• Review dividend tax position (‌£500 allowance quickly consumed)
• Check marriage allowance eligibility
• File self-assessment on time (31 January penalty risk)

Common Mistakes

❌ Not claiming all business expenses — Keep receipts, claim everything legitimately deductible

❌ Ignoring National Insurance optimizations — Sometimes deferring income saves NI more than income tax

❌ Holding too much in taxable accounts — Max out ISA allowance first

❌ Dividend tax miscalculation — The £500 allowance disappears quickly; track carefully

❌ Missing the self-assessment deadline — 31 January is firm; late filing triggers penalties

✅ Register with HMRC immediately if self-employed — No tax bill protection if unregistered

✅ Keep organized records — HMRC spot-checks up to 6 years back

✅ Use tax software or accountant — Usually pays for itself in relief optimization

Bottom Line

The HMRC system favors structured planning:

1. Employees: Maximize ISA/pension contributions; claim trading allowance if self-employed on side
2. Self-employed: Track all expenses, pay quarterly, consider corporate structure if income >£100k
3. Investors: Use ISAs first, then tax-loss harvest in taxable accounts
4. High earners: Pension contributions give 45% relief (vs. 20% for basic rate) — consider salary sacrifice via employer schemes

Get personalized advice from a qualified tax advisor or accountant — HMRC has become increasingly sophisticated in automated compliance checks. The cost of professional guidance (typically £500–£2,000) is often recovered in tax savings for mid-to-high earners.

Use our UK Income Tax Calculator to estimate your 2026/27 tax bill.