Understanding when you start paying tax in the UK can feel confusing, especially if your income comes from different sources.
Employees, freelancers, side hustlers and small business owners are often unsure how much they can earn before tax applies.
The reality is that the UK tax system includes several allowances and thresholds designed to ensure people can earn a certain amount before paying income tax. However, the exact amount depends on how you earn the money and whether you have multiple income sources.
This guide explains how the rules work in 2026, including the Personal Allowance, the trading allowance for side income, and what happens when your income rises above the tax-free limits.
The Personal Allowance: Your Main Tax-Free Threshold
The most important threshold in the UK tax system is the Personal Allowance.
This is the amount of income most people can earn each tax year before paying income tax.
For the 2025–2026 tax year, the Personal Allowance is:
£12,570
This means that if your total income is below £12,570, you will usually not pay income tax.
This allowance applies to most forms of income, including:
- • Employment income (salary or wages)
- • Self-employment profits
- • Pension income
- • Some other taxable income sources
What Happens When You Earn More Than £12,570?
Once income rises above the Personal Allowance, income tax begins to apply.
The first tax band is known as the Basic Rate.
For most people in England, Wales and Northern Ireland, the tax bands look like this:
| Income Range | Tax Rate |
|---|---|
| Up to £12,570 | 0% |
| £12,571 – £50,270 | 20% |
| £50,271 – £125,140 | 40% |
| Over £125,140 | 45% |
For example, if someone earns £20,000 per year, tax is only charged on the portion above £12,570.
That means:
£20,000 – £12,570 = £7,430 taxable
Tax owed: 20% of £7,430 = £1,486
The key point is that tax is only applied to income above the allowance, not to the entire salary.
The £1,000 Trading Allowance (Side Hustles and Small Earnings)
Many people earn extra money outside their main job.
Examples include:
- • Selling items online
- • Freelance work
- • Small creative projects
- • Occasional services
The UK tax system includes something called the Trading Allowance, which allows people to earn up to £1,000 per year from trading activities without paying tax or registering as self-employed.
This rule helps people with small side projects avoid unnecessary paperwork.
If income from trading stays below £1,000 per year, it normally does not need to be declared.
However, once income exceeds £1,000, registration for Self Assessment may be required.
What About People Who Are Self-Employed?
Self-employed individuals benefit from the same Personal Allowance as employees.
This means the first £12,570 of profit is usually tax-free.
However, two additional points matter for self-employed people:
National Insurance Contributions
Even if income tax is not due, National Insurance may still apply once profits reach certain thresholds.
Profit vs Income
For self-employed people, tax is based on profit, not total revenue.
For example:
| Revenue | Expenses | Profit |
|---|---|---|
| £18,000 | £6,000 | £12,000 |
Because the profit is £12,000, the individual would normally remain below the Personal Allowance and owe no income tax.
What If You Have Multiple Income Sources?
A common source of confusion is when people earn money from several places.
Examples include:
- • Employment plus freelance work
- • A side business alongside a salary
- • Rental income plus employment
In these cases, all taxable income is combined when calculating whether the Personal Allowance has been exceeded.
Example:
| Income Source | Amount |
|---|---|
| Salary | £11,000 |
| Freelance work | £4,000 |
| Total income | £15,000 |
Because total income is above £12,570, tax would apply to the amount above that threshold.
When the Personal Allowance Starts to Reduce
High earners face an additional rule.
Once income exceeds £100,000, the Personal Allowance begins to reduce.
The allowance decreases by £1 for every £2 earned above £100,000.
This means the allowance disappears entirely once income reaches £125,140.
This creates a well-known effective tax band where the marginal tax rate becomes significantly higher.
Other Situations That Affect How Much Tax You Pay
Although the Personal Allowance is the main threshold, other factors can influence how much tax someone pays.
These include:
Student loan repayments
Student loan thresholds can reduce take-home income once earnings exceed certain levels.
Marriage allowance
Some couples can transfer a portion of their Personal Allowance to a spouse.
Pension contributions
Certain pension payments can reduce taxable income.
Each of these factors can change a person’s overall tax position.
Why People Sometimes Think They Are Paying Too Much Tax
It is common for people to feel they are paying more tax than expected.
Usually this happens because:
- • They misunderstand the Personal Allowance
- • They forget multiple income sources are combined
- • Payments on account increase Self Assessment bills
- • PAYE tax codes temporarily overestimate income
Most situations can be resolved by reviewing income totals and checking tax codes.
Summary
The UK tax system allows most people to earn a certain amount before paying income tax.
For the 2025–2026 tax year, the key threshold is:
£12,570 Personal Allowance
Below this level, income tax normally does not apply.
However, once income rises above this threshold, tax is charged on the portion above it according to the UK tax bands.
Other rules such as the £1,000 trading allowance, National Insurance thresholds, and multiple income sources can affect how much tax someone ultimately pays.
Understanding these thresholds makes it much easier to plan income, avoid surprises, and stay compliant with the UK tax system.