What is the 40% Tax Bracket?
The 40% tax bracket is also known as the higher rate tax band and, if your income is within the boundaries of that tax band, you are liable to pay 40% tax on any earnings that are over the threshold.
In the 2024/2025 tax year the higher rate 40% tax threshold starts at £50,271 and stops at £125,140.
This means any earnings you have over the threshold of £50,271 is taxed at 40% up to the £125,140 limit.
When you start paying 40% tax on your income does depend on factors like what personal allowances and tax reliefs are available to you.
Read our short tax guide for 40% taxpayers to find out how much income tax you will pay at the higher rate and if you can claim tax relief at 40% to reduce your tax bill.
How much do I have to earn to pay 40% income tax?
The amount of tax you pay on your income depends on your tax free personal allowance and which tax band your income falls into.
For example the tax thresholds for the 2024/2025 tax year are:
- Standard Personal Allowance is £12,570 – No tax.
- Basic Rate – 20% on income over £12,571 (standard Personal Allowance) up to £50,270.
- Higher Rate tax band – 40% on income between £50,271 and £125,140.
- Additional Rate tax band – 45% on any income over £125,140.
In this example you will pay 40% tax on your income over the £50,271 threshold and not on all of your income.
Any earnings you may have over £125,140 will be taxed at the additional rate tax band rate of 45%.
Higher rate taxpayers also have to pay more than the standard 20% on any savings and on any income from dividends.
Different tax rates and bands apply for Scotland.
40% tax example
In this example we are using a total income of £60,000 and a standard personal allowance of £12,570.
- 0% tax up to £12,570.
- 20% tax from £12,571 up to £50,270.
- 40% tax from £50,271 up to £60,000.
The income that you will pay 40% tax on is worth £9,729 with the rest taxed at a rate of 20% or not taxed.
40% tax on savings income
Higher rate taxpayers get a personal savings allowance of £500 per tax year which can be used against income from savings.
All savings income above the PSA threshold will be taxed at 40% instead of 20% if you were a basic rate taxpayer.
Higher rate tax for dividend income
Forty percent taxpayers who have income from dividends will receive a dividend allowance worth £500 per tax year.
Dividend income above the dividend allowance threshold will be subject to a tax rate of 33.75% instead of 8.75% for basic rate taxpayers.
Does the 40% tax bracket change every tax year?
The 40% tax bracket can change in each tax year but this depends on the decisions made by the government in the budget.
An announcement by the government will be made each year confirming the new tax years tax free personal allowance and other tax bands.
It’s important to know what the tax free personal allowance is and the 40% tax bracket to help you work out how much tax you should pay.
You can find out about the current tax years tax free personal allowance and 40% tax bracket here.
Tax codes and higher rate tax payers
The tax code you are given by HMRC is directly linked to your tax free personal allowance and it’s important to ensure your tax code is accurate.
It’s common for higher rate tax payers to have more complex tax affairs which can result in an incorrect tax code being used.
For example if you have a company benefit like a company car your tax code needs to reflect the correct benefit to be accurate.
If you feel like your tax code may be wrong you can contact HMRC to review and adjust your tax code if necessary.
Use our Tax Code Breaker below to double check you’ve been assigned the right tax code.
Tax Code Breaker – The Letters
The first three usually apply when you have more than one pension or job:
BR – You are taxed at a basic rate of 20% on the income from this job or pension.
D1 – All this job/pension’s income is taxed at the additional rate of 45%.
L – You are allowed the basic Personal Allowance of £12,570.
T – Your Personal Allowance is worked out through your tax code using extra calculations. For example, if your income has exceeded that allowable for basic rate tax then your Personal Allowance would be reduced.
M – Marriage Allowance where you have been transferred 10% of your partner’s Personal Allowance.
N – Marriage Allowance where you have transferred 10% of your Personal Allowance to your partner.
OT – There are two possible reasons for this code. Firstly, that you have started a new job and not given your new employer the necessary details to establish a tax code or your P45. Secondly, your Personal Allowance has been used up.
NT – You are not paying any tax on this income.
Get out your payslip and get tax code cracking!
Can I reduce my 40% tax bill?
Yes. Being tax efficient is not the same as tax evasion or avoidance; it’s just being financially savvy.
One good thing about paying tax at the higher rate is you can get tax relief at the higher rate (instead of the basic rate of 20%) which will double the tax rebate you can reclaim in some cases.
Please read on to find out some of the ways you can increase your tax efficiency and reduce the amount of 40% tax you pay.
Charitable contributions and 40% tax
Everyone’s a winner with Gift Aid because it means that the charity gets more money and you can claim tax relief on your charitable donation on your tax return.
As a higher rate tax payer you are eligible to claim the difference between the rate of tax you pay and the basic rate on your donation.
For a Higher Rate (40%) taxpayer:
- Your charitable donation = £100.00
- Charity gets £125.00
- You claim a tax rebate of £25.00
So, a £125 gift to charity only really costs you £75.00! To claim the tax relief don’t forget to declare it on your tax return or you can ask HMRC to adjust your tax code.
Cash ISAs and higher rate tax relief
One of our nation’s favourite ways to save. They are a totally legitimate place to put your savings and receive tax free interest payments. The limit for some is even as high as £20,000!
You can find out more about cash ISA’s and the process of putting money into an ISA here.
Private pension payments tax relief at 40%
Contributions to a company or private pension are subject to tax relief at the highest rate you pay.
So, if you’re paying 40% on any part of your income, make sure you get your pension contributions, outside of PAYE, on your tax return.
This type of pension tax relief normally applies to private pension contributions only.
For someone with a government or company pension scheme under PAYE you will normally get any higher rate pension tax relief automatically so you don’t need to take any action.
If you are eligible claiming back the additional tax relief lowers the amount of taxable income you earn and decreases the proportion that is taxed at 40%.
For first time claimants it’s good to know that you are allowed to claim for the last four tax years.
Being smart with asset ownership
This applies to those who are in a civil partnership or married, where one person is a higher earner and the other is either a low earner, or doesn’t have taxable income.
Transferring assets to the lowest earner in a partnership can bring down the overall percentage rate at which capital gains tax will be payable.
This transaction itself is not liable to CGT; therefore you can make a profit on the sale of these items after you have changed the official owner.
Once this ‘gift’ has been received by the lower earner, any income made from the asset would be taxed at their lower rate which can bring more tax saving for the family.
To learn more about Capital Gains Tax, read our Guide to Capital Gains Tax.
Tax rebates for work expenses at 40% tax relief
You can claim tax relief on business or work expenses at the highest rate you pay tax which is a bonus for forty percent taxpayers.
Instead of receiving tax relief at the basic rate of 20% you can get 40% instead if you pay tax at the higher rate.
These tax relief allowances can apply to employed and self-employed taxpayers alike. They exist specificially for taxpayers who have to pay for items that are solely for their work use.
The regulations are sizeable, detailed and apply to all types of work. They cover an array of work-related expenses; from business mileage and uniform cleaning, to trade union fees and tools and equipment.
Claiming tax relief on your work expenses is a useful way of bringing down your overall income tax bill and paying less at 40%.
To find out more about which work expenses you are eligible for, read our Tax Relief for Expenses of Employment Guide which will let you know about the different reliefs available to you.
Is higher rate tax the same as additional rate?
The higher rate is different to the additional rate of tax and depending on your earnings you may have to pay tax at both rates.
Additional rate tax kicks in after the higher rate tax threshold ends and means you pay tax at 45% on all the income you earn within the addtional rate tax threshold.
