Pay rises, bonuses, getting new clients on board – they’re all incredibly exciting and you should take some time to celebrate each and every one of these wins. While you’re enjoying your well-earned success though, you may notice the 40% tax bracket creeping closer, but what does this mean for you?
We’ll take a look at what the 40% tax bracket is, how much you can earn before reaching the threshold, and what it means for your tax bill.
What is the 40% tax bracket?
The 40% tax bracket is the ‘higher rate’ income tax band for those who earn between £50,271 - £125,140. There are four rates for income tax, starting with the personal allowance, and then moving on to the basic rate, higher rate, and the additional rate.
2023/24 and 2024/25 income tax rates for England, Wales, and Northern Ireland
| Tax Rate | 2023/24 Tax Band Threshold | 2024/25 Tax Band Threshold |
| Personal allowance: How much income you can earn before you start to pay income tax. No tax on this income. | Up to £12,570 | Up to £12,570 |
| Basic rate income tax: 20% tax on the proportion of income which falls into this tax bracket. | £12,571 - £50,270 20% | £12,571 - £50,270 20% |
| Higher rate income tax: The part of your income which falls into this tax band is taxed at 40% | £50,271 - £125,140 40% | £50,271 - £125,140 40% |
| Additional rate income tax: This is the highest rate. The income you earn above this threshold is subject to tax at 45% | £125,140 upwards 45% | £125,140 upwards 45% |
Check out our article on UK tax rates for England, Wales and Northern Ireland here. The rates are different if you’re based in Scotland, which we explain in a separate article.
How much do I have to earn to be in the 40% tax bracket?
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%.
Does the 40% tax bracket ever change?
The thresholds for the 40% tax bracket can change depending on decisions made by the government as part of the annual budget. They’re unlikely to be changing anytime soon though, because 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.
What does the marginal tax rate mean?
In a nutshell, the marginal tax rate is the tax you pay on your highest pound of income. Let’s say you earn £60,000 per year; your marginal tax rate is 40% because that’s the tax bracket you’re in for the next pound that you earn.
Will I pay 40% tax on all my earnings?
The great news is no, you will not pay 40% tax on all your earnings. It’s a common misconception that once you hit a tax band, you’ll pay the new tax rate on every penny you earn, but we promise this isn’t the case.
For example
If you earn a total of £55,000 each tax year you’ll pay:
0% tax on the first £12,570
20% tax on your earnings between £12,571 - £50,270
40% tax on your earnings between £50,271 – £55,000
So, in total, you’re only paying the 40% tax rate on £4,729 of your earnings.
What higher rate tax means for your savings allowance
If you’re in the basic or higher rate tax band, you’ll be entitled to a personal savings allowance. This allows you to earn up to £1,000 in interest on your savings, without having to pay any tax on it.
It’s important to note that as you enter the higher rate bracket, your allowance will reduce from £1,000 to £500.
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What can I do to reduce my taxes if I’m in the higher rate?
Hitting the 40% tax bracket might mean you’re earning more, but it’s also useful to make sure you’re as tax efficient as possible. Every little helps when it comes to reducing your tax bill.
Check if you’re eligible for any tax allowances or deductions
In the UK, you may be entitled to certain tax allowances – for instance, if you’re married you may be entitled to marriage allowance (depending on whether or not you and your spouse meet the requirements).
If you’re self-employed and run your own business then you might be able to deduct allowable expenses to reduce your tax bill. You might even be able to claim different types of allowances and relief for Capital Gains Tax.
Are you paying yourself efficiently?
Running your business as a sole trader means any profit you make will be subject to income tax and National Insurance, even if you don’t actually take it from the business for personal use.
Some business owners find it more tax efficient to form a limited company, and then pay themselves by taking a salary as a director along with dividend payments from the company’s profits.
The business structure you choose can have a big impact on the way that you pay tax, but there are considerations depending on your circ*mstances!
Learn more about operating as a sole trader or a limited company in our blog.
Look at investing into a savings account
You can save £20,000 tax-free each year (the 2023/24 rate is also frozen for 2024/25) with an Individual Savings Account (ISA). To reduce your taxable income, you can put money into your savings, and you won’t pay tax on any interest or dividends you receive from these accounts.
Ensure you’re paying into your pension scheme
If you’re employed, paying into your pension scheme reduces your taxable income (as your pension contributions are free from income tax). It also means whenever you pay into your pension, you’re refunded the income tax you initially paid. You can also make tax-efficient pension payments if you’re self-employed – particularly if you operate as a limited company.
See what salary sacrifice schemes your employer offers
This isn’t standard in every business, but some businesses may offer a salary sacrifice scheme, where they allow you to exchange some of your salary for things like additional pension contributions (or another non-cash benefit). This can help reduce your taxable income!
Donate to charity
Any donations you make to a charity or amateur sports club are completely tax free. If you want to make donations, you’ll need to keep a record and take it off your total taxable income.
Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team and get an instant online quote.
