Taxes are one of the few certainties in life — yet for many people in the UK, they remain confusing, frustrating, or something to be avoided entirely. Whether you’re employed, self-employed, or earning a bit extra on the side, understanding how taxes work can help you save money, avoid penalties, and take control of your finances.
This guide breaks down the basics of the UK tax system, what you need to know based on how you earn, and how to make sure you stay compliant — without unnecessary stress.
What Is Tax?
Tax is money collected by the government to fund public services like the NHS, education, roads, and defence. In the UK, there are several types of tax, but the ones most individuals encounter are:
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Income Tax
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National Insurance
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Council Tax
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VAT (Value Added Tax)
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Capital Gains Tax
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Dividend Tax
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Stamp Duty
Let’s focus on the most common: Income Tax and National Insurance.
Income Tax: How It Works
Income Tax is paid on the money you earn through work, pensions, savings interest, rental income, and more. The good news? You only pay tax on income above a certain threshold — your Personal Allowance.
Personal Allowance (2025/26 tax year)
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Most people get the first £12,570 of income tax-free
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Anything earned above that is taxed in bands:
| Band | Income Range | Tax Rate |
|---|---|---|
| Basic | £12,571–£50,270 | 20% |
| Higher | £50,271–£125,140 | 40% |
| Additional | £125,141+ | 45% |
Your tax is usually deducted automatically via PAYE (Pay As You Earn) if you’re employed.
National Insurance (NI)
NI contributions go towards your entitlement to State Pension and certain benefits. Rates and thresholds differ slightly depending on whether you’re employed or self-employed.
As of 2025:
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Employees pay 8% on earnings above £12,570
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Employers also pay NI on your wages (doesn’t affect your take-home)
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Self-employed individuals pay Class 2 and Class 4 NI, depending on profits
Self-Employment and Side Income
If you earn more than £1,000 a year from self-employment or side hustles, you must register with HMRC and complete a Self Assessment tax return.
That includes:
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Freelancers
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Creators or influencers earning money
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Online sellers or resellers
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Landlords
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Gig workers (Uber, Deliveroo, etc.)
You’ll report your income, claim allowable expenses, and pay any Income Tax and NI due.
Deadlines to remember:
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Register by 5 October after the end of the tax year you earned income
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Submit online return by 31 January
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Pay your bill by 31 January (and possibly 31 July if making payments on account)
Failing to file or pay on time can result in penalties and interest — so don’t leave it too late.
Claiming Expenses and Allowances
If you’re self-employed or have side income, you can deduct expenses to reduce your taxable profit. Common allowable expenses include:
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Travel costs
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Office equipment or software
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Mobile phone or internet (if used for work)
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Marketing or website costs
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Professional fees or insurance
You can also use the trading allowance (up to £1,000 of income tax-free from casual self-employment) or the property allowance if you rent out a room or property.
PAYE and Tax Codes
If you’re employed, your employer handles tax deductions through PAYE. But mistakes happen, and it’s important to check your tax code.
Your tax code (e.g. 1257L) tells your employer how much tax-free income you’re entitled to. If it’s wrong, you could be overpaying or underpaying tax.
You can view and correct your tax code via your Personal Tax Account on GOV.UK.
Other Taxes to Be Aware Of
1. Capital Gains Tax (CGT)
Paid when you sell an asset (e.g. shares, second property) that’s increased in value. The annual allowance is currently £3,000. Anything above is taxed at 10–28% depending on your income and the asset type.
2. Dividend Tax
If you receive dividends from shares or a business, the first £500 is tax-free (as of 2025), with anything above taxed at 8.75%, 33.75% or 39.35% depending on your income level.
3. Council Tax
A local tax based on your home’s valuation band and local council rates. You may be eligible for discounts if you live alone or are on a low income.
4. Stamp Duty Land Tax (SDLT)
Paid when you buy property. The current threshold is £250,000 for most buyers, with discounts for first-time buyers.
How to Stay Organised and Stress-Free
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Keep records: Store receipts, invoices, payslips, and bank statements
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Use tools: Apps like QuickBooks, FreeAgent, or a simple spreadsheet
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Set money aside: If you’re self-employed, save around 25–30% of your income for tax
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Get help if needed: A qualified accountant or tax adviser can be well worth the cost
Tax-Free Accounts
Take advantage of tax-efficient options like:
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ISAs – Tax-free interest, dividends or capital gains on savings/investments
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Pensions – Contributions receive tax relief and grow tax-free
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Premium Bonds – No tax on any prizes you win
These tools help you keep more of what you earn, legally and efficiently.