What Is the 40% Tax Bracket?

A tax bracket is a range of income levels that is subject to a specific tax rate.

It’s like dividing your income into different “buckets” and applying a different tax rate to each bucket. For example, if your income falls within the “basic rate” tax bracket, you pay a certain percentage of tax on that portion of your income. If you also have income in the “higher rate” bracket, you pay a higher percentage of tax on that portion.

This system is used to create a progressive taxation structure, where individuals with higher incomes pay a higher percentage of their income in taxes.

The UK’s income tax system for the 2024/25 tax year consists of three main tax bands:

• The Basic rate (20%), which applies to taxable income up to £37,700.  
• The Higher rate (40%), which applies to taxable income between £37,701 and £125,140.  
• The Additional rate (45%), which applies to taxable income over £125,140.

In this article, we’ll focus on the 40% tax bracket. The 40% tax bracket isn’t a flat rate applied to your entire income. Instead, it’s a marginal rate that only applies to the portion of your income that exceeds a certain threshold. This nuanced approach to taxation can have a substantial impact on your tax bill and overall financial health.

What is the 40% Tax Bracket?

The 40% tax bracket, often referred to as the higher rate tax band, is a significant part of the UK’s taxation system. It’s a tax rate that applies to a specific range of income, deducting 40% of an individual’s earnings that fall within this bracket.

This tax bracket is not static and can change based on decisions made by the government during the annual budget announcement. It’s crucial to understand that the 40% tax rate is not applied to an individual’s total income, but only to the portion that exceeds the lower limit of the bracket.

For instance, if your annual income is £70,000, only the amount above £50,270 will be subject to the 40% tax. The portion of your income that falls between £50,270 – £12,570 will be taxed at 20% as basic income.

Understanding the 40% tax bracket is essential for financial planning and tax optimisation. It helps you to anticipate your tax bill and plan your finances accordingly.

Who Does the 40% Tax Bracket Apply To?

The 40% tax bracket, often referred to as the higher rate tax band, is applicable to individuals who fall within a specific income range. This tax band is designed for those earning an annual income between £50,571 and £125,140 for the tax year 2023-24.

If you find yourself within this income range, you will be subject to a 40% tax rate on the portion of your income that exceeds £50,270. This means that if your annual income is £70,000, only the amount above £50,270 will be taxed at 40%.

The remaining portion of your income, that falls between £50,270 and £12,570, will be taxed at a lower rate of 20% as it falls under the basic income tax band. Any income below £12,570 will not be taxed, as per the Standard Personal Allowance rules.

It’s important to note that the thresholds for the 40% tax bracket can change depending on decisions made by the government as part of the annual budget. However, the current personal tax-free allowances and bands are frozen until 2028.

Therefore, it’s crucial to keep tabs on how much personal allowance you’re entitled to, as well as the current tax rates. This will help you understand your tax bill better and plan your finances accordingly.

Understanding Marginal Tax Rates

The concept of marginal tax rates is crucial to understanding the 40% tax bracket. In essence, a marginal tax rate is the tax you pay on the highest pound of your income. It’s not a blanket rate applied to your entire income, but rather, it’s applied to each additional pound you earn above a certain threshold.

For instance, if you’re in the 40% tax bracket, it doesn’t mean that all your income is taxed at 40%. Instead, only the portion of your income that exceeds the higher rate threshold is taxed at this rate. The rest of your income, falling within lower tax bands, is taxed at their respective rates.

The 40% tax rate is a marginal tax rate, and it’s only applicable to the portion of your income that exceeds the higher rate threshold. It’s essential to keep this in mind when planning your finances for the tax year.

How the 40% Tax Bracket Works

To fall into the 40% tax rate bracket, your annual income must exceed the basic rate income of £50,570. This means that any income you earn above this threshold will be subject to a 40% tax rate.

However, it’s important to note that not all of your earnings will be taxed at this rate. Only the portion of your income that exceeds £50,570 will be taxed at 40%. The rest of your income will be taxed at different rates depending on the tax band it falls into.

For instance, if your annual income is £70,000, only the amount above £50,570, which is £19,430 in this case, will be subject to the 40% tax. The remaining £50,570 will be taxed at the basic rate of 20%.

So, while being in the 40% tax bracket does mean a higher tax liability, it doesn’t mean that all your income is taxed at this higher rate. The goal is not just to earn more, but also to retain as much of your hard-earned money as possible. 

How to Be Tax Efficient and Reduce Your Higher Rate Income Tax Bill

Being in the 40% tax bracket doesn’t necessarily mean you have to pay a high rate of tax on all your income. There are several strategies you can employ to be tax efficient and reduce your higher rate income tax bill.

Firstly, consider making tax-free investments. Individual Savings Accounts (ISAs) or pension payments are excellent examples of such investments. They not only provide tax-free allowances but also help reduce your taxable income, potentially moving you into a lower tax bracket.

Another strategy is to make use of tax allowances and deductions. If you qualify for certain tax reliefs, such as charitable contributions, you can significantly reduce your taxable income and tax liability. This is particularly beneficial for individuals who work from home and have a defined strategy to apply for tax reduction.

Salary sacrifice schemes offered by your employer can also be a great way to lower your taxable income. By giving up a portion of your pre-tax income in exchange for perks like childcare vouchers or cycle-to-work programmes, you can effectively reduce your tax bill.

The key to reducing your tax bill in the 40% tax bracket is to be proactive and strategic about your financial decisions.

Check If You’re Eligible for Any Tax Allowances or Deductions

When it comes to reducing your tax bill, it’s crucial to check if you’re eligible for any tax allowances or deductions. These can significantly lower your taxable income, helping you to stay within a lower tax bracket.

One such allowance is the standard personal allowance. This is the amount of income you can earn each year without having to pay any tax on it. The amount can change every tax year, so it’s important to stay updated.

If you’re married or in a civil partnership, you might be eligible for the marriage allowance. This allows you to transfer a portion of your personal allowance to your spouse, potentially reducing your tax bill.

Tax allowances and deductions can vary depending on your circumstances. It’s always a good idea to seek professional advice to ensure you’re making the most of the allowances and deductions available to you.

Efficient Ways to Pay Yourself

When it comes to reducing your tax bill, one of the most effective strategies is to pay yourself efficiently. This is particularly relevant if you’re self-employed or running your own business.

The way you choose to pay yourself can significantly impact your tax liability. For instance, if you operate as a sole trader, all your profits are subject to income tax and National Insurance, even if you don’t withdraw them for personal use.

If you form a limited company, you can pay yourself a salary as a director and take dividend payments from the company’s profits. This can often be more tax-efficient, as dividends are taxed at a lower rate than income.

It’s important to note that the most tax-efficient way to pay yourself can change every tax year, depending on changes to the tax band thresholds and rates.x savings.

Does the 40% Tax Band Change Every Tax Year?

The 40% tax band, also known as the higher rate income tax band, is subject to change every tax year. These changes are typically announced during the government’s annual budget. The government outlines the tax-free personal allowance and additional tax bands for the new fiscal year during this announcement.

The thresholds for the 40% tax bracket can change depending on decisions made by the government as part of the annual budget. However, the current personal tax-free allowances and bands are frozen until 2028. It’s important to keep tabs on how much personal allowance you’re entitled to, as well as the current tax rates.

The 40% tax bracket applies a 40% tax deduction to an individual’s income. This tax bracket deducts a significant portion of a taxpayer’s income. Individuals with an annual income between £50,571 and £125,140 for the year 2023-24 will fall under the 40% tax bracket.

The impact of the 40% tax bracket is that taxpayers will be required to pay a significant portion of their income payable to HMRC. As a result, individuals within the 40% tax bracket will see a reduction in their disposable income that would otherwise go into savings, investments, or general day-to-day spending.

In order to fall within the 40% tax bracket, your annual income needs to exceed the basic rate income of £50,570. Any income you make above the basic rate income will be taxed at 40%. Any income that exceeds £125,141 will go into the additional income band and will be taxed at 45%.

The 40% tax rate bracket is applicable for individuals with an annual income greater than £50,571 and lower than £125,140. The 40% tax rate will be calculated for the portion of income that exceeds £50,270.

To be in the 40% tax bracket, your total income for the tax year will need to exceed the basic rate, landing you in the ‘higher rate’ bracket. The higher rate tax bracket for 2023/24 and 2024/25 is £50,271 – £125,140. This means the amount you make that’s within this bracket will be taxed at 40%, and then £125,140 upwards will go in to the ‘additional rate’ band, which is taxed at 45%.

Understanding Capital Gains Tax

Capital Gains Tax (CGT) is a crucial aspect to consider when discussing the 40% tax bracket. It’s a tax on the profit when you sell or dispose of an asset that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive.

For instance, if you sell a property that is not your main home, the profit you make from the sale could be subject to CGT. The rate of CGT you pay depends on your income tax band. If you’re in the 40% tax bracket, you’ll pay a higher rate of CGT.

It’s important to note that everyone in the UK has an annual tax-free allowance for capital gains, known as the Annual Exempt Amount. For the tax year 2023/24, this is £12,300. This means you only have to pay CGT on gains above this amount.

However, the rules around CGT can be complex. There are different rates for different types of assets, and certain reliefs and exemptions may apply. For example, you don’t usually have to pay CGT on gifts to your spouse or civil partner.

Understanding how CGT works can help you plan your finances more effectively and potentially reduce your tax liability. It’s always a good idea to seek professional advice if you’re unsure about your CGT obligations.

Dividend and Inheritance Tax in Relation to the 40% Tax Bracket

The 40% tax bracket doesn’t just affect your income tax, it also has implications for your dividend and inheritance tax. If you’re a high earner in this tax band, it’s crucial to understand how these taxes work.

Dividend tax is levied on the income you earn from your investments. The rate you pay depends on your income tax band. For those in the 40% tax bracket, the dividend tax rate is 32.5%. This means that a significant portion of your investment returns could be eaten up by tax.

Inheritance tax, on the other hand, is a tax on the estate (property, money, and possessions) of someone who’s died. While there’s normally no inheritance tax to pay if the value of your estate is below the £325,000 threshold, or you leave everything above this threshold to your spouse, civil partner, a charity or a community amateur sports club, the rate is 40% on anything above the threshold.

Tax laws can be complex and it’s always a good idea to use an income tax calculator or seek advice from a tax professional to ensure you’re not paying more tax than you need to.

Final Thoughts on the 40% Tax Bracket

Understanding the 40% tax bracket is crucial for optimising your tax payments and making the most of your hard-earned income. It’s not just about knowing how much you’ll be taxed, but also about understanding the various ways you can reduce your taxable income and maximise your personal allowance.

Remember, tax laws and rates can change every tax year, so it’s important to stay updated. Use an income tax calculator to help you navigate your tax liability and make informed decisions about your finances.

Lastly, don’t hesitate to seek professional advice if you’re unsure about anything. Taxation can be complex, but with the right knowledge and tools, you can navigate the system effectively and efficiently.

5 FAQs About UK Income Tax

1. What are the UK income tax rates for the 2023/24 tax year?

The UK income tax system uses a progressive tax system, meaning you pay a higher rate of tax on higher levels of income. For the 2023/24 tax year, the tax bands and rates are as follows:

• Basic rate: 20% on income between £12,570 and £50,270.
• Top rate: 40% on income between £50,271 and £150,000.
• Additional rate: 45% on income over £150,000.

2. What is the personal allowance and how does it reduce my taxes?

The personal allowance is the amount of income you can earn tax-free. For the 2023/24 tax year, the personal allowance is £12,570. This means that you won’t pay any income tax on the first £12,570 of your income.

3. What is marginal tax rate and how does it affect my tax bill?

Your marginal tax rate is the rate of tax you pay on the next pound of income you earn. For example, if you earn £40,000, your marginal tax rate is 20%.

4. What is capital gains tax and how does it work?

Capital gains tax is a tax on the profit you make from selling assets, such as shares, property, or a second-hand car. The rate of capital gains tax depends on your income and the type of asset you’re selling.

5. How can I reduce my tax bill?

There are several ways to reduce your tax bill, including:

• Making pension contributions: Pension contributions are tax-deductible, which can reduce your taxable income.
• Claiming tax relief on expenses: You may be able to claim tax relief on certain expenses, such as work-related travel and uniform costs.
• Using Individual Savings Accounts (ISAs): ISAs offer tax-free savings and investment opportunities.
• Seeking professional advice: A tax advisor can help you identify tax-saving opportunities and ensure you’re paying the correct amount of tax.