The A to Z of income tax

Income tax in the UK can feel like a maze of rates, allowances, reliefs and rules. Whether you’re a sole trader, employee, or company director, understanding the basics can help you keep more of your hard-earned money, know the right questions to ask your accountant and stay on the right side of HMRC. 

A is for allowances 

Your personal allowance is the slice of income you can earn before income tax kicks in. If you’re an employee earning a regular salary, your employer will spread it out over the tax year to give you regular take-home pay. If you earn more than £100,000 the personal allowance is gradually withdrawn. 

Don’t forget other allowances which you may qualify for, such as Marriage Allowance, personal savings allowance and the dividend allowance. 

B is for bands 

Basic, higher and additional rate bands decide how much tax you pay on your income. The more you earn, the bigger the slice HMRC takes, but knowing where the thresholds are helps you plan. For the avoidance of doubt if you are a higher rate taxpayer you don’t pay higher rate tax on all your income – just the slice of income that falls above the basic rate band. 

C is for Construction Industry Scheme (CIS) 

CIS determines whether sub-contractors in the building trade are paid gross (without tax deducted) or have 20% or 30% tax deducted from their pay. Registered sub-contractors have 20% deducted, unregistered sub-contractors get a 30% deduction, with the main contractor passing this on to HMRC as a down payment on the sub-contractors’ income tax bills. 

D is for dividends 

While dividends are an important part of the remuneration strategy for company owners, they are different in nature to salary and bonuses. Dividends are the way company profits are shared amongst shareholders, and not directors (albeit these categories may be the same in many businesses). Dividends are taxed differently from salary, with a tax-free allowance £500 each year (2026/2027) and separate rates to employment and savings income.  

E is for employment income 

Your wages, salary, bonuses, and benefits from employment all fall into the employment income category. PAYE usually takes care of the income tax (and national insurance contributions), and your tax code governs the personal allowance your employer will apply. 

F is for filing deadline 

If you pay and report your income tax through self-assessment, the 31st January deadline will be all too familiar. This is the filing deadline for your tax return, as well as the date by which you need to pay tax due (whether the whole amount or potentially payments on account spanning two tax years). If you fall within the Making Tax Digital for income tax rules from 2026, this will remain your filing deadline for your end of year tax return. 

G is for Gift Aid 

Gift Aid is a long-running Government scheme which means your donations to charity are effectively made from your pre-tax income. When you donate to charity and tick the Gift Aid box, the charity claims back basic rate tax, which uplifts your donation by 25p for every £1 you give. If you’re a higher- or additional- rate taxpayer, you can reclaim the rest yourself. 

H is for HMRC 

His Majesty’s Revenue & Customs, the Revenue, the taxman or HMRC. The tax authority for the UK, formed by a merger of the Inland Revenue and Customs & Excise Government departments in 2005. It collects taxes, national insurance contributions and duties of all kinds. It sends the letters – albeit e-mails and app notifications are replacing those brown envelopes – and if you’re having a very good day, they may send you a refund. 

I is for income types 

Not all income is created equal. Employment, self-employment, savings, dividends, pensions, state benefits – they’re all taxed differently, via the vast yellow books of taxation legislation.  

J is for joint accounts 

Interest from joint savings is usually taxed 50/50 between account holders unless you tell HMRC otherwise. So, if that’s not as you intended it to work, agree with HMRC how the tax should be split. 

K is for K codes 

Do you have a tax code starting with K? A 'K' code means you have more additional items to tax through PAYE than your allowances. Instead of a tax-free amount of earnings each month due to your personal allowance, you have tax calculated on more than just your income. This is often due to expensive benefits-in-kind or other non-cash items which are being taxed via payroll. 

L is for limited company 

Incorporated your business and now running it through a limited company for greater tax efficiency and access to better funding opportunities? The profits of your company will now be taxed by corporation tax rather than income tax, but you will still have income tax to pay on salary and dividends from the company and any other income you receive from elsewhere.  

M is for Making Tax Digital for Income Tax (MTD for IT) 

From 6th April 2026, the first sole traders and landlords will move to the MTD for IT regime (those with qualifying income of £50,000 or more). MTD for IT means replacing your existing record keeping systems with MTD-compliant digital systems, sending quarterly updates to HMRC and replacing the self-assessment tax return with a MTD tax return which will be pre-populated with data HMRC already have.  

N is for National Insurance Contributions (NICs) 

NICs are technically not even a tax, let alone income tax, but they feel very much like an extra layer of income tax to employees and self-employed taxpayers. For employers, they are an extra cost via employers’ contributions for each employee. NICs was originally set up to pay for the state pension and the welfare state although it just adds to the general tax coffers these days. Historically the thresholds haven’t been the same as income tax, but they are increasingly converging.  

O is for official interest rate 

If you are late paying your income tax bill, HMRC will charge you interest and very likely a penalty (on top of any penalty for filing returns late). Conversely if you’ve paid too much tax, HMRC will pay you interest with your refund. Sounds even? Maybe not quite – the interest rate you’ll pay on overdue tax is the base rate + 4% (which means 7.75% from 19th March 2026) and the interest you’ll receive on overpayments is the base rate – 1% (2.75% from 19th March 2026). 

P is for PAYE 

Pay As You Earn (PAYE) is the withholding system that collects income tax (and NICs) from employees via payroll to be paid to HMRC by employers. It means many people in the UK don’t have the admin-headache of filing a self-assessment tax return and HMRC doesn’t have to work quite so hard to collect tax. 

Q is for qualifying loans 

Interest on qualifying loans (such as a loan to invest in a close company or to buy shares in an employee-controlled company) can be deducted from your taxable income if you meet the strict rules which apply. 

R is for rates 

In 2026/2027 England, Wales and Northern Ireland have three main rates of income tax – basic is 20%, higher is 40%, additional is 45%. Scottish taxpayers have more rates and they range from 19% to 48%. There are also separate rates for dividends which relate to the basic, higher and additional rate bands: 10.75%, 35.75% and 39.35%.  Knowing your marginal rate (the highest rate of income tax you’re currently paying) helps with your tax planning for the year and beyond. 

S is for self-assessment 

If you have income that isn’t taxed through PAYE, or your tax affairs aren’t straightforward, HMRC may expect you to file a self-assessment tax return. The deadline is 31st January online – miss it by a day and you should expect a penalty. 

T is for trading allowance 

Self-employed and either just starting out, your business is a side hustle or you’re only making a small profit? The trading allowance is your friend. The first £1,000 of self-employment income you make is tax-free thanks to the trading allowance. You can also claim it as an alternative to claiming expenses if it works out better for your business. Handily, if your self-employment income doesn’t exceed the trading allowance, you don’t need to file a self-assessment tax return either. 

U is for umbrella company 

A method of paying workers, often on temporary contracts, through limited companies created for that purpose. While many umbrella companies are set up and run entirely within the rules, a number have been used to avoid tax and as such umbrella companies are currently on HMRC’s radar. 

V is for venture capital trusts (VCTs) 

If you have money to invest and don’t mind backing higher-risk start-up businesses in exchange for some juicy tax breaks, VCTs invest in companies with gross assets below £30 million, less than 250 employees and less than seven years old. In return you can expect tax-free dividends on up to £200,000 of shares plus no CGT when you sell them and 20% tax relief when you make your investment. You must hold the shares for five years to keep the tax relief.

W is for workplace pension 

All workplaces must offer a pension scheme, with employer contributions added to your own employee payments under auto-enrolment. You can opt out, but you would be throwing away free money for your retirement from your employer. 

X is for Xmas parties 

Employers can provide the annual office Christmas party tax-free for employees if it is open to all and costs less than £150 a head, but for sole traders it’s just a cost. 

Y is for year-end planning 

March and April are your tax-planning sweet spots. Use allowances before they reset or even use them either side of the tax year-end to ‘double’ the benefit. 

Z is for zero worries 

Knowing our team at TaxAssist Accountants is looking after your income tax affairs will remove the stress from looking after your books so you can concentrate on running your business. 

How TaxAssist can help 

TaxAssist Accountants can help you keep on top of your income tax obligations and make sure you’re claiming all the allowances and reliefs to which you’re entitled. Call us on 01234 331777 or use our online contact form.  

Last updated: 19th May 2026