Pay rises, bonuses, and landing new clients—these moments in your career are exciting and well-deserved! However, with success, you may find yourself approaching the 40% tax bracket, also known as the “higher rate” of income tax in the UK. But what exactly does this mean, and how will it impact your tax bill?
In this article, we’ll break down the 40% tax bracket in the UK tax brackets, how much you need to earn to reach it, and ways to be tax-efficient if you’re in or nearing this 40% tax threshold.
What is the 40% Tax Bracket?
The 40% tax bracket is officially referred to as the higher rate of income tax. This rate applies to individuals whose annual income falls between £50,271 and £125,140. The UK tax rates system is progressive, meaning different portions of your income are taxed at different rates, and only the income that falls within this range is taxed at 40%.
To put it in context, there are four main tax bands:
- Personal Allowance – 0% tax on income up to £12,570.
- Basic Rate – 20% tax on income between £12,571 and £50,270.
- Higher Rate – 40% tax on income between £50,271 and £125,140.
- Additional Rate – 45% tax on income above £125,140.
Personal Allowance Adjustment
Once you start earning above ÂŁ100,000, your personal allowance starts to taper and is reduced by ÂŁ 1 for every ÂŁ 2 you earn above the threshold. In simple terms when your earning reaches ÂŁ 125, 140, your personal allowance is completely eliminated.
2023/24 and 2024/25 Income Tax Rates for England, Wales, and Northern Ireland
Here’s a look at how income tax rates are structured for the current and upcoming tax years for non saving and non dividend income in England, Wales and Northern Ireland:
| Tax Bands UK | UK Income Tax Rates 2023/24 | UK Income Tax Rates 2024/25 |
| Personal Allowance (0%) | Up to ÂŁ12,570 | Up to ÂŁ12,570 |
| Basic Rate (20%) | £12,571 – £50,270 | £12,571 – £50,270 |
| Higher Rate (40%) | £50,271 – £125,140 | £50,271 – £125,140 |
| Additional Rate (45%) | Over ÂŁ125,140 | Over ÂŁ125,140 |
How Much Can I Earn Before I Pay 40% Tax Bracket?
To fall into the 40% tax bracket, your income needs to exceed £50,271. However, you won’t pay a 40% tax on your entire earnings—just on the portion of your income that falls into the higher rate band.
For example, if you earn £60,000 a year, here’s how your tax will break down:
- 0% tax on the first £12,570.
- 20% tax on the income between £12,571 and £50,270.
- 40% tax on the income between £50,271 and £60,000.
So, only ÂŁ9,729 of your income will be taxed at 40%, not your entire earnings.
Marginal Tax Rate Explained
The marginal tax rate is a term you’ll often hear when discussing tax brackets. This refers to the rate of tax applied to the next pound you earn.
For instance, if your income is £55,000, your marginal tax rate is 40%, as any additional earnings will be taxed at this rate. However, it’s important to remember that this doesn’t mean all of your income is taxed at 40%. The portions of your income within the lower tax brackets are still taxed at 0% and 20%, respectively.
What Higher Rate Tax Means for Your Savings Allowance
If you’re in the higher rate tax band, this will affect your personal savings allowance.
- Basic rate taxpayers (those earning up to £50,270) have a personal savings allowance of £1,000.
- Higher rate taxpayers (those earning more than £50,271) see their allowance reduced to £500.
- Earners who earn above ÂŁ 125,140 have no personal saving allowance.
This allowance refers to the amount of interest you can earn from savings accounts without paying tax on it.
How to Reduce Your Tax Liability in the 40% Tax Bracket
Earning more is always great, but ensuring you’re maximising your tax efficiency is also important. Here are some strategies you can consider if you find yourself in the 40% tax bracket:
- Tax Allowances and Deductions
You may be eligible for certain allowances, such as the marriage allowance or capital gains relief. If you’re self-employed, you can also deduct allowable business expenses to reduce your taxable income.
- Business Structure and Efficiency
If you’re running a business, consider how you pay yourself. Operating as a sole trader means your profit is subject to income tax and National Insurance, even if you don’t withdraw it for personal use. Some find it more tax-efficient to operate as a limited company, paying themselves a salary and dividends.
- Pension Contributions
Contributions to your pension can reduce your taxable income, as these contributions are free from income tax. If you’re self-employed or running a limited company, this is an efficient way to save for the future while lowering your tax bill.
- Salary Sacrifice Schemes
Some employers offer salary sacrifice schemes, allowing you to exchange part of your salary for benefits like additional pension contributions or childcare vouchers. This can not only reduce your taxable income but also national insurance contributions for employees and employers while providing other valuable benefits.
- Charitable Donations
Donations to charity through gift aid are also tax-free under charity tax relief. As a higher rate taxpayer, you can claim the difference between the basic rate (20%) and your tax rate (40%) on donations. This can help reduce your overall tax liability.
Changes to the 40% Tax Bracket
Tax rates and thresholds are set by the UK government and can change over time, though the current personal allowance and tax bands are frozen until 2028.
Historically, tax rates have fluctuated significantly. For example, in the 1970s, the highest income tax rate was 83% before being reduced to 60% and finally to the current 40% in 1989. So, while the current bands are frozen, it’s always a good idea to stay informed about potential future changes.
Conclusion
Understanding the 40% tax bracket and how marginal tax rates work is key to making informed financial decisions. By learning about the various allowances and strategies to reduce your taxable income, you can manage your tax liability more effectively and keep more of your hard-earned income.
If you’re approaching the higher rate tax bracket or already in it, it’s a good idea to seek professional tax advice to ensure you maximise your tax efficiency. Our comprehensive tax return services can help you navigate this process and ensure you make the most of the available tax allowances.
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