Income Tax and National Insurance (NI) Basics

UK citizens have to pay the income tax bill that is levied on several types of earnings. These can range from employment wages, profits from running a business, rental income from property, and dividends from shares. It is imperative for each citizen to get accustomed to income tax and national insurance basics to be able to file their tax returns efficiently.

Most of the tax-paying individuals in the UK qualify for a Personal Allowance. This gives individuals a significant tax break by reducing the amount of taxable income while paying tax. Anyone can be eligible for a Personal Allowance, including students. The sum may vary depending on your tax history and the allowances claimed. However, it is to be noted that you must not include personal or financial information like your credit cards and National Insurance number without consulting your accountant first. In some instances, you don’t have to pay tax on your entire taxable income. The details regarding the Personal Allowance are explained below in more detail: 

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What Do You Need To Know About Personal Allowance?

The personal allowance is the amount of tax-free income that an individual can enjoy. Personal allowance may vary from individual to individual. For example, the personal allowance may be greater if a person has claimed a marriage allowance or a blind person’s allowance. Some individuals can be qualified for a lesser amount due to taxes they might owe for previous years.

For the tax year 2025/26, the standard personal allowance is £12,570. It is worth noting that the personal allowance would remain at £12,570 for tax years up to and including 2027/28.

What about your personal allowance if you earn over £ 100,000?

As soon as your income reaches the threshold of £100, 000, the rules change because your personal allowance is reduced by £1 for every £2 you earn over the threshold of £100, 000. Meaning that if your net income exceeds £125,140, your personal allowance would be zero, and the entire amount would be taxable.

How Is The Payable Income Tax Determined?

Generally speaking, the amount of income tax you are liable to pay depends on two factors:

• The amount of income that falls within each tax band.
• The amount of income that falls above your personal allowance.

Remember that the tax year begins from 6th April and ends on 5th April the following year.

You may want to speak to a tax accountant to help you calculate the correct amount of income tax you owe to HMRC.

How much income tax are you liable to pay?

The amount of income tax you pay is subject to different tax bands. This implies that the more you earn, the more income tax you have to pay. The reason behind the proportionality is to encourage people to contribute a higher portion of their earnings to the Government’s treasury in taxes if they are earning higher. So it is important to consult your accountant to know more about how much tax you need to pay to stay compliant.

The table below reveals the income tax rate for the tax year 2025-26 that you are liable to pay depending on how much you earn:

For 2025/2026:

An erroneous calculation of the income tax is a common problem faced by many individuals in the UK. It is therefore advisable to speak to our in-house tax accountants before calculating your income tax and filing your annual tax return. Income tax is a common problem faced by many individuals in the UK. Therefore, it is advisable to speak to our in-house tax accountants before calculating your income tax and filing your annual tax returns.

National Insurance

What do you need to know about National Insurance (NI) on employment income?

National Insurance contributions are tax payments that are meant to be made from your income. These tax payments make you eligible to enjoy specific benefits like the State Pension and Maternity Allowance. As an employee, you will pay Class 1 National Insurance contributions. The amount of National Insurance you pay is based on your employment status and your income. You are not required to pay NI annually, but you will be required to make NI contributions according to your employer’s arrangement.

These can be monthly, weekly or quarterly instalments – depending on the employee’s contract. Principally, your employer will automatically deduct Class 1 NI contributions from your income if you meet the following conditions:

• You are under State Pension age
• Your earnings are over £242 a week from one employment.

This implies that if you earn more than the regular income amounts, you will make extra NI contributions. Notably, once you pay that extra income as NI contribution, you can not claim that amount back even if you earn less during the other periods of the tax year.

Furthermore, according to the rules of the current tax year, which runs from 6 April 2025 to 5 April 2026, you have to pay National Insurance once you earn more than £242 per week. Now, the rate of National Insurance you are liable to pay depends on your earnings, such as:

•  If you earn £242 to £967 a week (£1,048 to £4,189 a month), the NI rate is 8%
• If your income is more than £967 a week (£4,189 a month), the NI rate is 2%

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What do you pay National Insurance on?

You and your employer are legally required to pay National Insurance contributions on your income, including sick leave pay, holiday pay or maternity leave pay. Usually, they are paid for any benefit or reward that is highly liquid. There are some flexibilities to this rule; you might be exempted if a portion of your income is in the form of shares in the company you are employed with; this can be achieved with the help of tax-approved share schemes.

If you are entitled to certain benefits, you, as an employee, are not liable to make National Insurance contributions. However, there are also exceptions to this rule where employers must pay NI on the monetary value of any benefits they are entitled to enjoy.

What does your National Insurance cover?

Paying for National Insurance helps you enjoy various state benefits and services, which include:

• Basic state pension.
• Additional State Pension.
• New State Pension.
• New Jobseeker’s Allowance (JSA).
• Contribution-based Employment and Support Allowance (ESA).
• Maternity Allowance.
• The National Health Service (NHS).
• Bereavement support payment.

What do you need to know about Voluntary ‘Class 3’ National Insurance rates?

The purpose of Class 3 voluntary National Insurance Contributions is to help you get a higher State Pension by filling any gaps in your National Insurance record. You may receive a full new State Pension once you reach the State Pension age or if you have 30 qualifying years of National Insurance contributions. If you have less than 30 qualifying years of National Insurance Contributions, you may receive a reduced State pension. A minimum of 10 qualifying years of NI contributions is required to obtain the new State Pension.

We advise you to pay Class 3 voluntary contributions to increase your pension entitlement. For 2025-26, you can pay Class 3 NI contributions at a rate of £17.75 per week. It is the maximum payable amount per week.

What do you need to know about Voluntary ‘Class 2’ National Insurance rates?

Voluntary Class 2 NI contributions can be made if you are running your own business, working as a self-employed individual, or working in a foreign country.

For 2025/26, you have to pay weekly Class 2 NI contributions at a flat rate of £3.50 per week if you earn £6,845 or more. It is the small profits threshold amount per year.

Making Class 2 NI contributions is optional for any self-employed individual making profits lower than the small profit threshold. However, we advise you to pay Class 2 NI even if you are below the small profit threshold to increase your entitlement to state benefits.

What do you need to know about Voluntary ‘Class 4’ National Insurance rates?

For the tax year 2025/26, self-employed individuals must pay Class 4 National Insurance on profits above £12,570 (Lower Profits Limit). The Class 4 NI rate is 6% on profits between £12,570 and £50,270. Similarly, the Class 4 NI rate is 2% on profits above £50,270 (Upper Profits Limit).