Income tax in London works exactly like income tax anywhere else in England: there is no city-level tax, and HM Revenue and Customs (HMRC) applies the same national rules to everyone who lives or works in the capital.1GOV.UK. HM Revenue and Customs For the 2026/27 tax year, the first £12,570 of income is tax-free under the Personal Allowance, and earnings above that are taxed at 20%, 40%, or 45% depending on which band they fall into.2GOV.UK. Income Tax Rates and Personal Allowances The UK tax year runs from 6 April to 5 April.
Rates and Bands for 2026/27
The UK uses a graduated system. Each rate applies only to the slice of income that falls inside its band, not to your whole salary.
- Basic rate of 20% on taxable income from £12,571 to £50,270
- Higher rate of 40% on taxable income from £50,271 to £125,140
- Additional rate of 45% on taxable income above £125,140
These figures are unchanged from the previous year.3HM Revenue and Customs. Income Tax Rates and Allowances for Current and Previous Tax Years To see how the bands work in practice, take someone earning £60,000. They pay nothing on the first £12,570, then 20% on the next £37,700, then 40% on the remaining £9,730. The total comes to roughly £11,432, well below what a flat 40% would produce.
How the Personal Allowance Works
Most people in London get the full £12,570 Personal Allowance. It has been frozen since 2021/22 and is set to stay at that level until at least 2030/31.2GOV.UK. Income Tax Rates and Personal Allowances Because London wages tend to run above the national average, the freeze pulls more earnings into taxable bands each year as pay rises but the allowance holds flat.
There is a significant catch at higher incomes. Once your adjusted net income passes £100,000, the Personal Allowance is reduced by £1 for every £2 you earn above that line. By £125,140, the allowance is gone entirely.2GOV.UK. Income Tax Rates and Personal Allowances Between £100,000 and £125,140 you pay 40% on the earnings and also lose tax-free income at the same time, producing an effective marginal rate of 60%. Pension contributions are one of the most common ways to bring adjusted net income back below £100,000 and reclaim the allowance.
National Insurance Runs Alongside Income Tax
Workers in London also pay National Insurance (NI), which is a separate deduction with its own thresholds. It funds the state pension and certain benefits.
For employees on the standard category letter, NI is charged at 8% on weekly earnings between £242 and £967, and 2% on anything above £967 per week.4GOV.UK. National Insurance Rates and Categories – Contribution Rates In annual terms that is 8% on earnings from about £12,570 to £50,270, then 2% above that.5GOV.UK. Rates and Thresholds for Employers 2026 to 2027 Self-employed workers pay Class 4 NI instead, at 6% on profits between £12,570 and £50,270 and 2% on profits above that. The old mandatory Class 2 flat-rate contribution was removed for most self-employed workers in April 2024, though you still build state pension credits. Employers pay their own NI at 15% on earnings above the secondary threshold.
How You Actually Pay: PAYE and Self Assessment
If you are an employee, income tax and NI come out of your pay before you see it, through Pay As You Earn (PAYE). HMRC gives each employee a tax code that tells the employer how much to withhold, taking the Personal Allowance and any adjustments into account. If you have one job and no other significant income, PAYE does the whole job and you never file a return.
You need to register for Self Assessment if you have untaxed income, for example self-employment profits, rental income, or investment gains above the allowances. The deadline for filing online and paying any tax due is 31 January following the end of the tax year.6GOV.UK. Self Assessment Tax Returns – Deadlines If you owe more than £1,000 through Self Assessment, HMRC may also require payments on account: two advance instalments toward next year’s bill, due 31 January and 31 July.
Penalties for Filing or Paying Late
HMRC’s penalty structure escalates quickly. For a late Self Assessment return:
- Immediately after the deadline, a £100 fixed penalty, charged even if you owe no tax
- After three months, £10 per day up to a maximum of £900
- After six months, 5% of the tax due or £300, whichever is greater
- After twelve months, a further 5% of the tax due or £300, whichever is greater
Late payment is penalised separately, with a 5% surcharge on unpaid tax at 30 days, another 5% at six months, and another 5% at twelve months.7GOV.UK. Self Assessment Tax Returns – Penalties Interest is charged on top. The late payment interest rate for income tax is 7.75% as of January 2026, set at the Bank of England base rate plus 4%.8GOV.UK. HMRC Interest Rates for Late and Early Payments Between penalties and interest, a few months’ delay can add 15% or more to the original bill.
Tax on Savings, Dividends, and Capital Gains
Many London residents earn investment income alongside their salary. Each type has its own allowance and rates.
Interest From Savings
Interest from bank accounts, building societies, and similar deposits is taxable, but a Personal Savings Allowance shelters the first portion. Basic-rate taxpayers get £1,000, higher-rate taxpayers get £500, and additional-rate taxpayers get nothing. Interest inside the allowance is tax-free; anything above it is taxed at your marginal rate.
Dividends
Dividends from shares have their own tax-free allowance of £500 per year. Above that, they are taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. These rates sit below the equivalent income tax rates because the company paying the dividend has already paid corporation tax on the profits.
Capital Gains
When you sell an asset for more than you paid, the profit is a capital gain. The annual tax-free allowance is £3,000, down sharply from £12,300 a few years ago.9GOV.UK. Capital Gains Tax – What You Pay It On, Rates and Allowances Gains above the allowance are taxed at 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers, regardless of whether the gain comes from property or another asset.10GOV.UK. Capital Gains Tax – What You Pay It On, Rates and Allowances Qualifying business disposals can attract a reduced rate of 14% under Business Asset Disposal Relief.
If You Have Just Moved to London From Abroad
Whether you owe UK tax at all depends on residency. The Statutory Residence Test, set out in Schedule 45 of the Finance Act 2013, is HMRC’s formal framework.11GOV.UK. Residence and FIG Regime Manual The simplest trigger is the 183-day rule: spend 183 or more days in the UK in a tax year and you are automatically UK resident, with your worldwide income falling inside the UK tax net.12GOV.UK. Tax on Foreign Income – UK Residence and Tax Additional tests can pull in people who spend fewer days but have significant work, family, or property ties. If you move to or from the UK partway through a tax year, split-year treatment may divide the year at your arrival or departure date, so only income during the UK portion is taxed here.
From 6 April 2025, the UK abolished the old remittance basis for non-domiciled residents and replaced it with the Foreign Income and Gains (FIG) regime.13GOV.UK. Technical Note – Changes to the Taxation of Non-UK Domiciled Individuals Under FIG, if you were non-resident for at least 10 consecutive years before becoming UK resident, you can claim relief on foreign income and gains for up to four tax years after your arrival.14GOV.UK. HS266 Foreign Income and Gains (FIG) Regime 2026 Qualifying foreign income and gains are not taxed in the UK during that window, and you can bring the money into the country without extra charges. The trade-off is that claiming FIG relief costs you your Personal Allowance and your capital gains tax-free allowance for that year. You must claim separately for each year, and the deadline is 31 January of the second year after the relevant tax year ends. Borderline residency and FIG cases almost always benefit from professional advice.