Calculation Methodology
This page documents the exact formulas, rates, and assumptions used by the CalculateTax.uk calculation engine. Every rate is sourced from HMRC publications for the 2025-26 tax year (6 April 2025 to 5 April 2026). If you find a discrepancy between our figures and an official source, please contact us.
On this page
1. Income Tax: England, Wales & Northern Ireland
Income tax in England, Wales, and Northern Ireland uses the same rates and thresholds. The system is progressive: each band only applies to the portion of income that falls within it. A person earning £60,000 does not pay 40% on the full amount, only on the slice above £50,270.
| Band | Rate | Taxable income | Maximum tax in band |
|---|---|---|---|
| Personal Allowance | 0% | £0 to £12,570 | £0 |
| Basic Rate | 20% | £12,571 to £50,270 | £7,540 |
| Higher Rate | 40% | £50,271 to £125,140 | £29,948 |
| Additional Rate | 45% | Above £125,140 | No cap |
Source: HMRC Income Tax rates and Personal Allowances 2025-26
2. Income Tax: Scotland (6 bands)
Since 2017-18, Scotland has set its own income tax rates on non-savings, non-dividend income. The Personal Allowance remains UK-wide at £12,570. Scottish taxpayers pay these rates instead of the England/Wales/NI bands above.
| Band | Rate | Taxable income |
|---|---|---|
| Personal Allowance | 0% | £0 to £12,570 |
| Starter Rate | 19% | £12,571 to £15,397 |
| Basic Rate | 20% | £15,398 to £27,491 |
| Intermediate Rate | 21% | £27,492 to £43,662 |
| Higher Rate | 42% | £43,663 to £75,000 |
| Advanced Rate | 45% | £75,001 to £125,140 |
| Top Rate | 48% | Above £125,140 |
Source: Scottish Income Tax 2025-26
3. Personal Allowance taper (the 60% trap)
The standard Personal Allowance of £12,570 is reduced by £1 for every £2 of adjusted net income above £100,000. This means:
- At £100,000 income, you keep the full £12,570 allowance
- At £112,570, the allowance is halved to £6,285
- At £125,140, the allowance is zero
Because you lose £1 of allowance for every £2 earned, each £1 of income between £100,000 and £125,140 is effectively taxed at 40% (the Higher Rate) plus 20% (the lost allowance benefit), producing a 60% marginal rate. This is higher than the 45% Additional Rate that applies above £125,140.
Our calculation applies this taper automatically. When the input salary exceeds £100,000, the engine reduces the Personal Allowance according to the formula: adjusted_allowance = max(0, 12570 - (income - 100000) / 2). The income tax calculation then uses this adjusted allowance instead of the full £12,570.
Source: HMRC Personal Allowance taper
4. National Insurance Class 1 (employees)
Employee National Insurance contributions are calculated on gross earnings. The rates and thresholds are identical across all four UK nations. NI is a separate deduction from income tax and is not reduced by pension contributions made through the net pay arrangement.
| Earnings band | Employee rate | Threshold name |
|---|---|---|
| Up to £12,570 per year | 0% | Below Primary Threshold |
| £12,570 to £50,270 | 8% | PT to UEL |
| Above £50,270 | 2% | Above UEL |
5. National Insurance Class 2 & Class 4 (self-employed)
Self-employed individuals pay two types of National Insurance on their trading profits. From April 2024, Class 2 became voluntary for most self-employed people but can still be paid to protect benefit entitlements. Class 4 is the main profit-based contribution.
Class 2 NI
| Condition | Rate |
|---|---|
| Flat rate (voluntary from April 2024) | £3.50 per week (£182 per year) |
| Small Profits Threshold | £6,725 per year |
Class 4 NI
| Profit band | Rate |
|---|---|
| Up to £12,570 (Lower Profits Limit) | 0% |
| £12,570 to £50,270 (Upper Profits Limit) | 6% |
| Above £50,270 | 2% |
6. Construction Industry Scheme (CIS) deductions
Under CIS, contractors in the construction industry must deduct tax at source from payments to subcontractors and pass it to HMRC. The deduction rate depends on the subcontractor's registration status. CIS deductions count as advance payments of the subcontractor's tax liability and are offset against their Self Assessment bill.
| Subcontractor status | Deduction rate | Applied to |
|---|---|---|
| Registered subcontractor | 20% | Labour element of payment |
| Unregistered subcontractor | 30% | Labour element of payment |
| Gross payment status | 0% | No deduction |
Gross payment status is available to subcontractors who meet HMRC's turnover and compliance tests. The deduction applies to the labour portion of each payment only; materials, VAT, and equipment hire are excluded from the CIS deduction calculation.
On our CIS pages, we also calculate the subcontractor's income tax and Class 4 NI liability on their net trading profit. The Class 4 rate used is 6% (the 2025-26 rate), not the pre-April 2025 rate of 9%.
7. Pension contributions and tax relief
Our pension pages model relief at source, the most common method for workplace pensions. Under this method, pension contributions are deducted from gross pay before income tax is calculated, reducing the employee's taxable income. National Insurance is still calculated on the full gross pay (pension contributions do not reduce NI liability under relief at source).
The formula is: taxable_income = gross_salary - (gross_salary × pension_percentage). Income tax is then calculated on this reduced figure. For a £40,000 salary with a 5% pension contribution, the taxable income becomes £38,000. The £2,000 pension contribution effectively costs the employee £1,600 after basic rate tax relief (a 20% saving).
Higher rate taxpayers benefit more: the same £2,000 contribution costs £1,200 after 40% relief. Our pension pages show this cost breakdown for each salary and contribution level.
The Annual Allowance for pension contributions in 2025-26 is £60,000 (or 100% of earnings, whichever is lower). Contributions above this trigger the Annual Allowance Charge.
Source: HMRC Pension tax relief
8. Student loan repayments
Student loan repayments are collected through PAYE as a percentage of earnings above a plan-specific threshold. The repayment does not reduce taxable income or NI liability. Thresholds for 2025-26:
| Plan | Threshold | Rate |
|---|---|---|
| Plan 1 (pre-2012 England/Wales, all NI/Scotland) | £24,990/year | 9% |
| Plan 2 (post-2012 England/Wales) | £27,295/year | 9% |
| Plan 4 (Scotland post-2012) | £31,395/year | 9% |
| Plan 5 (from 2023-24) | £25,000/year | 9% |
| Postgraduate Loan | £21,000/year | 6% |
9. Dividend tax
Dividends are taxed at separate rates from employment income. The first £500 of dividend income in 2025-26 is covered by the Dividend Allowance and is tax-free regardless of your tax band. Dividends above the allowance are taxed depending on which income tax band they fall into (after adding them on top of your other income).
| Band | Dividend rate |
|---|---|
| Basic Rate band | 8.75% |
| Higher Rate band | 33.75% |
| Additional Rate band | 39.35% |
Source: HMRC Tax on dividends 2025-26
10. Capital Gains Tax
Capital Gains Tax applies to the profit when you sell or dispose of an asset that has increased in value. The annual exempt amount for 2025-26 is £3,000. Gains above this are taxed at rates that depend on whether the asset is residential property or another type of asset, and on your income tax band.
| Asset type | Basic Rate taxpayer | Higher/Additional Rate |
|---|---|---|
| Residential property | 18% | 24% |
| Other assets (shares, etc.) | 10% | 20% |
11. General assumptions
Unless a page explicitly states otherwise, every calculation on CalculateTax.uk assumes:
- Tax code 1257L (the standard code for 2025-26, giving a Personal Allowance of £12,570)
- Single employment with no other income sources, benefits in kind, or salary sacrifice arrangements
- Employee status (Class 1 NI), not self-employed, unless the page is in the self-employed or CIS section
- No marriage allowance transfer unless the page is specifically about marriage allowance
- No student loan unless the page models a specific plan
- Evenly distributed pay across 12 months (weekly/monthly figures divide the annual total; no irregular bonus months)
- Relief at source method for pension contributions
- Resident in the UK for the full tax year, with no split-year treatment or non-domicile status
Pages that model specific scenarios (pension contributions at X%, student loan Plan 2, salary plus £5,000 bonus, etc.) state their additional assumptions in the page header. The calculation result reflects those specific inputs.
12. Worked example: £45,000 salary in England
This example shows how the engine calculates take-home pay for a £45,000 annual salary in England with tax code 1257L, no pension, and no student loan.
| Personal Allowance (0%) | £0 |
| Basic Rate: (45000 - 12570) × 20% | £6,486 |
| Total income tax | £6,486 |
| Below PT (0%) | £0 |
| 8%: (45000 - 12570) × 8% | £2,594.40 |
| Total NI | £2,594.40 |
| Gross salary | £45,000.00 |
| Income tax | -£6,486.00 |
| National Insurance | -£2,594.40 |
| Annual take-home | £35,919.60 |
| Monthly | £2,993.30 |
| Effective tax rate | 20.2% |
See the full page: £45,000 salary after tax