Current Tax Rates

As a permanent employee, your deductions are made before the money reaches your bank account. As a contractor, things are slightly different; it becomes your responsibility to take care of things.

With tax rates and allowances constantly changing, it can soon become confusing. We have taken the two most common personal taxes and have looked at these in more detail.

Income Tax

Income Tax is a tax which is paid on the income you receive. It is collected by His Majesty’s Revenue and Customs (HMRC) along with other taxes and used to fund government expenditure as determined by HM Treasury.

Order of Taxation

Currently income is taxed in the order:

• Non-Savings Income
• Savings Income
• Dividend Income

From April 2027 this will change slightly and the order of taxation will be:

• Income which is not Property, Savings or Dividend Income
• Property Income
• Savings Income
• Dividend Income

Tax Bands

The rate of tax payable depends on your tax band. In England and Northern Ireland the tax bands are as follows:

Wales has the power to set its own income tax bands however these currently mirror England and Northern Ireland. Scotland has its own tax bands and rates which can be found here 2026 to 2027 – Scottish Income Tax: rates and bands – gov.scot

The Personal Allowance reduces by £1 for every £2 that your adjusted net income is above £100,000.

Tax Rates

The rates of tax depend on the type of income that is subject to tax. For 2026/27 income is taxed as follows:

From April 2027, the rates will be as follows:

Further to this, there are a number of allowances available:

• Starting rate for savings – After utilising the Personal Allowance, you may also get up to £5,000 of interest and not have to pay tax on it provided that this is your only source of taxable income within this band.
• Personal Savings Allowance – Over and above the personal allowance and starter rate for savings (if applicable,) The first £1,000 of savings income for basic rate taxpayers and the first £500 for higher rate taxpayers is tax free.
• Dividend Allowance –  Over and above the personal allowance, the first £500 of dividend income is tax free
• Marriage Allowance – This lets an individual transfer £1,260 (10%) of their Personal Allowance to their spouse or civil partner. This reduces their tax by up to £252 in the tax year.

There are also two reliefs available which extend your basic rate tax band:

• Gift Aid – Put simply, personal charity donations made under the Gift Aid regime are grossed up by the basic rate of tax by HMRC. If you are a higher rate or additional rate taxpayer then these can be reported on your self-assessment tax return and extend your basic rate tax band by the grossed up amount.
• Pension Contributions – Similarly, personal pension contributions and salary deducted contributions made under the ‘relief at source’ regime receive basic rate tax relief. If you are a higher rate or additional rate taxpayer then these can be reported on your self-assessment tax return and extend your basic rate tax band by the grossed up amount.

National Insurance

Whereas income is taxed on a cumulative basis, for employees National Insurance is calculated and paid per employment. National Insurance contributions are paid to qualify for certain benefits and the state pension.

There are different classes of national insurance that are payable when certain thresholds are exceeded and also depending on if you are employed or are a sole trader.

Class 1 – Employed

When an individual is employed and thresholds are exceeded, their salary would be subject to both employer and employee National Insurance contributions.

• Employer national insurance contributions do not affect the net pay of the employee and are simply an expense for the employer. Employer national insurance contributions receive Corporation Tax relief.
• Employee national insurance contributions do affect the net pay of the employee. They are deducted from the gross pay (just like PAYE) and are paid across to HMRC by the employer on their behalf.

The relevant thresholds for Class 1 National Insurance are:

• Lower Earnings Limit – lowest amount an employee can receive in salary to receive a qualifying year for state pension and other benefits.
• Primary Threshold – lowest amount an employee can receive in salary before paying employees National Insurance. Above this, employees will pay NI at 8% up to the Upper Earnings Limit.
• Secondary Threshold – lowest amount an employer can pay an employee before employers National Insurance is payable. Above this, employers will pay NI at 15%.
• Upper Earnings Limit – the threshold at which the rate of employees National Insurance changes. Above this, employees will pay NI at 2%.

For 2026/27 and 2027/28 the rates and thresholds are:

Points to note:

• For most employees, these thresholds are applied in relation to their pay frequency on a ‘use it or lose it’ basis. For limited company directors however, the annual threshold is applied on a cumulative basis, i.e. you would not pay National Insurance until your gross salary for the year had exceeded the annual threshold and would then pay National Insurance on all salary received after that.
• For eligible employers, there is an Employment Allowance, whereby the first £10,500 of Class 1 Employers NI is waived by HMRC.
• In addition to paying Class 1 employers NI over and above the Secondary Threshold, employers will also have to pay Class 1A NI at a rate of 15% on any taxable benefits in kind that are provided to employees.

Class 2 and Class 4  – Self-employed

Sole traders are not paid a salary as such and National Insurance is not then deducted at source. It is however reported and becomes payable via the self-assessment tax return. The class of NI payable depends on the level of profits for that tax year.

• Class 2 –  This confers entitlement to a qualifying year for the state pension. The Class 2 threshold is £7,105 for 2026/27 and £7,355 for 2027/28. Provided that this level of profit is reported, the Class 2 contributions are treated as having been paid, giving you a qualifying year for the state pension without having to make any payment. If profits are below this level you may be able to make additional voluntary contributions in order to protect your qualifying year.
• Class 4 – If your profits exceed £12,570 you will pay Class 4 NI at a rate of 6% up to profits of £50,270 and at 2% beyond this.

Any questions?

For guidance and advice regarding tax and your allowances, get in touch with our experts.