North Carolina Cuts Its Income Tax Rate to 3.99% for 2026
The January 1 reduction saves $26 for every $10,000 of North Carolina taxable income before credits.
North Carolina's individual income tax rate is now 3.99%, down from 4.25% in 2025. The reduction took effect January 1 under the schedule enacted in Session Law 2023-134. The state keeps its flat-rate system, applying the same rate to taxable income across filing statuses.
The North Carolina Department of Revenue (NCDOR) includes the reduction in its 2026 employer withholding instructions. Employees can receive the benefit through lower state withholding during the year, while taxpayers making estimated payments can use the new rate to calculate their 2026 state tax.
How Much Does the Lower Rate Save?
The table below compares North Carolina income tax for 2025 and 2026 at $80,000 and $160,000 of taxable income, showing the savings from the rate cut. The rate falls by 0.26 percentage points in 2026, saving $26 for every $10,000 of taxable income before credits. At the same taxable income, that is about a 6.1% reduction in the state tax calculated before credits.
| Taxable Income | 2025 (4.25%) | 2026 (3.99%) | Savings | Savings % |
|---|---|---|---|---|
| $80,000 | $3,400 | $3,192 | $208 | 6.1% |
| $160,000 | $6,800 | $6,384 | $416 | 6.1% |
A single filer with $80,000 of North Carolina taxable income saves $208 for the year from the rate cut alone. At $160,000, the saving is $416. Both examples hold taxable income constant and exclude tax credits.
These are taxable-income amounts after North Carolina adjustments and deductions, not gross salary. Changes in income, deductions, or credits can make a taxpayer's actual year-to-year savings different from these examples.
Why the Withholding Formula Uses 4.09%
The North Carolina Department of Revenue's 2026 withholding instructions use a 4.09% rate in the payroll formulas. The department explains that this is the 3.99% individual income tax rate plus 0.10 percentage point. Employers also account for filing status, deductions, withholding allowances, and pay periods when calculating the amount withheld.
The higher withholding percentage does not change the 3.99% rate used to calculate annual income tax. Money withheld from paychecks is credited toward that tax when the return is filed. The final return determines whether the taxpayer has paid too much or still owes a balance.
Which Tax Year Uses the New Rate?
The 3.99% rate applies to the 2026 tax year, with calendar-year returns generally filed in 2027. Taxpayers estimating their 2026 North Carolina income tax should use that rate when calculating the year's tax, then account for applicable credits and payments.
Our North Carolina income tax rate page explains the state calculation and provides worked examples. For available Form D-400 returns and instructions, visit our North Carolina income tax forms page and select the edition for the tax year you are filing.
References:
- Session Law 2023-134: House Bill 259. Section 42.1, individual income tax rate reductions. Establishes 4.25% for 2025 and 3.99% beginning in 2026. North Carolina General Assembly. Retrieved September 25, 2026.
- Tax Rate Schedules. Individual income tax rates for 2025 and 2026. North Carolina Department of Revenue. Retrieved September 25, 2026.
- 2026 Income Tax Withholding Tables and Instructions for Employers. Form NC-30, revised November 2025. Cover announcement and page 19 annualized withholding formula, including the distinction between the 3.99% income tax rate and 4.09% withholding rate. North Carolina Department of Revenue. Retrieved September 25, 2026.