Many people worry about having to pay more tax if their income increases, particularly if a pay rise means they move from being a ‘basic rate’ to a ‘higher rate’ taxpayer. This change can often be misunderstood by employees.

Earlier this year, we produced a short video explaining how higher rates of tax actually work to try and dispel the myths around the consequences of salary increases.

Higher rate myths

One of the common income tax myths is that when an individual’s income increases over the higher rate threshold they have to pay the higher rate of tax on all of their income.

This is not the case. Thanks to a series of tax bands, a higher rate taxpayer only needs to pay higher rate tax on their income above the higher rate threshold.

Using the current 2025/26 rates in England, Wales and Northern Ireland, a basic rate taxpayer pays 20% income tax on any income over their personal allowance. (The personal allowance for 2025/25 is £12,570.) A higher rate taxpayer – who earns more than the higher rate threshold of £50,270 - will pay 20% on the first part of their income, and then 40% only on income over that threshold. Any National Insurance is in addition to this.

Scottish taxpayers are subject to a more complex system of income tax rates and bands set by the Scottish Parliament. These only apply to income from employment, self-employment and property, as the tax rates for interest and dividend income are the same throughout the UK. But the same principles apply, with Scottish taxpayers only paying higher rates on any income that falls into the higher bands.

Budget Rumours

The current higher rate threshold is widely expected to stay the same, but there were rumours at the start of November that the Chancellor was considering increasing income tax rates in her Budget later this month.

One of the rumoured options was increasing income tax rates across the board by 2p in the pound. This would be a big change for many taxpayers, as the basic rate of 20% income tax on income between the personal allowance and higher rate threshold has been untouched for many decades. 

Further rumours suggested she might look to protect employees earning under £50,270 by reducing the main rate of employee’s National Insurance by 2%. This would mean effectively no overall tax increase for basic rate taxpayers, but higher earners would pay more tax on income over the higher rate thresholds.

Whilst these changes would not affect the Scottish tax rates, the Scottish Government’s budget would reduce if Scotland did not follow any decision to increase income tax rates in the rest of the UK.

The latest rumour suggests that these proposed changes have been set aside. Whatever does – or does not – happen to income tax rates at the Budget, it is important that employees understand how increasing tax rates apply to higher incomes. Our video sets out the background to this often tricky area so please consider sharing it with them.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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