The taxes on pay: Income Tax and National Insurance
The nutshell
Income Tax and National Insurance are two taxes taken from people's pay. The first part of a person's pay each year is tax-free, and pay above that is taxed at a set rate.
Every rate on this page comes from GOV.UK and non-partisan research. Each source tag — like GOV — opens where a fact comes from.
The basics
The two taxes on a wage
Two taxes usually come out of a wage before the money is paid: Income Tax and National Insurance. Together with VAT, these are the biggest sources of money for the government, and Income Tax alone raises the most.HoC
How Income Tax works
Income Tax has a tax-free part called the Personal Allowance, set at £12,570 a year for most people. Pay above that is taxed in steps: 20% up to £50,270, then 40%, and 45% on the highest pay.GOV
How National Insurance works
National Insurance is a second tax on money earned from work. Most employees pay 8% on the part of weekly pay between £242 and £967, and 2% on anything above that.GOV
Why more people are paying tax
The tax-free amount and the point where the 40% rate starts have been frozen. The House of Commons Library says these thresholds are due to stay the same until April 2031.HoC When thresholds stay flat while wages slowly rise, more people start to pay tax, or move into a higher band. This effect is called fiscal drag.
- The first £12,570 of pay is tax-free, and higher slices of income are taxed at higher rates, so higher earners pay a larger share
- Income Tax on wages is usually collected automatically through PAYE, so most workers never have to fill in a tax return
- Income Tax and National Insurance are two of the biggest sources of money for public services, according to the House of Commons Library
- Freezing the tax-free amount while wages rise pulls more people into paying tax, an effect the House of Commons Library calls fiscal drag
- National Insurance is charged on wages from work but not on income from pensions, savings or property, so two people with the same income can pay different amounts
- Having two separate taxes on the same pay, each with its own thresholds, makes the system harder to follow
The deep end6 min
The full shape of the two taxes
Income Tax is charged on most income, including wages, in bands. The first £12,570 a year, the Personal Allowance, is taxed at 0%. The next slice up to £50,270 is taxed at 20%, income up to £125,140 at 40%, and income above £125,140 at 45%, according to GOV.UK.GOV The Personal Allowance itself shrinks for very high earners, falling by £1 for every £2 of income above £100,000.GOV
National Insurance works alongside Income Tax but on different rules. Employees pay Class 1 National Insurance at 8% on weekly earnings between £242 and £967, and 2% above £967, according to GOV.UK.GOV National Insurance is charged on earnings from work, not on income such as pensions or savings, so two earners with the same total income can pay different amounts.
The frozen thresholds, and the debate about the freeze
The clearest live argument about the taxes on pay is not about the rates but about the thresholds. In the 2021 Budget the government froze the Personal Allowance and the higher-rate threshold, and later budgets extended that freeze. The House of Commons Library records that the thresholds are now due to stay frozen until April 2031.HoC
A freeze changes no rate on a payslip, so it is easy to miss. The House of Commons Library explains that when incomes rise while thresholds stay flat, more income is pulled into tax and more earners cross into higher bands, an effect known as fiscal drag. The same briefing sets out that the freeze is forecast to raise several billion pounds a year and to bring hundreds of thousands more people into paying Income Tax by 2030/31.HoC How much of a burden that is, and whether money is better raised this way or by changing rates, is a political choice rather than a settled fact.