What is the 40% tax bracket?

PHS Team

19 Mar, 2025

If you’ve heard of the 40% tax bracket but aren’t sure what it means or how it impacts your income. Understanding how the 40 tax bracket UK works can help you plan better.

Therefore, how this affects your take-home pay can help you plan better. Maybe you want to explore tax relief options like pension contributions or charitable donations to reduce your bill. 

Knowing your tax bracket for 40 ensures you make smart financial decisions, whether you’re a business owner, a freelancer, or a high-earning employee. 

What is the 40% Tax Bracket?

The 40% tax bracket in the UK is known as the higher rate tax band. For the 2024/25 tax year, you’ll pay 40% tax on income between £50,271 and £125,140. This doesn’t mean all your income is taxed at 40%, only the amount within this range. 

If your income exceeds £100,000, your allowance gradually reduces, meaning you might pay more tax overall. Knowing how the tax bracket 40 works helps you manage your finances and explore strategies to minimise your tax bill.

UK Income Tax Bands (2024/25 Tax Year)

The UK uses a progressive Income Tax system, which means the more you earn, the higher the percentage of tax you pay on the portion of income that exceeds each threshold. 

Who Does the 40% Tax Bracket Apply To?

The 40% tax bracket applies to individuals whose income falls within the higher rate tax band. But it’s not just about your salary; other types of income can push you into this bracket. Let’s break down who needs to pay the 40% tax:

• Higher earners: People with taxable income between £50,271 and £125,140 (2024/25 tax year).
• Full-time employees and self-employed individuals: Whether you earn a salary or run a business, you pay the 40 tax bracket UK on income within this range.
• Multiple income sources: If you have several income streams (like rental income or dividends), they combine to determine your tax band.
• Reduced personal allowance: If you earn over £100,000, your £12,570 personal allowance starts to decrease.

How Does the 40% Tax Rate Bracket Work?

The 40% tax rate applies to income within the higher rate tax band in the UK. For the 2024/25 tax year, this means you’ll pay 40% tax on earnings between £50,271 and £125,140.

However, you only pay 40% of the portion of your income within this range, not your entire income.
Let’s look at an example to understand how the 40 tax bracket UK works:

Example Calculation:

• Total annual income: £60,000
• Personal allowance (tax-free): £12,570
• Taxable income: £60,000 - £12,570 = £47,430

Now, split this taxable income into tax bands:

• Basic rate (20%): £37,700 × 20% = £7,540
• Higher rate (40%): £47,430 - £37,700 = £9,730 × 40% = £3,892

Total tax owed:

• Basic rate tax: £7,540
• Higher rate tax: £3,892
• Total tax bill: £11,432

Even though you earn £60,000, only £9,730 is taxed at 40%, while the rest falls within the 20% tax band.

Understanding this calculation helps you see how your income is taxed and why reaching the higher tax band doesn’t mean losing 40% of your entire income.

How Much Do I Have to Earn to Pay 40% Income Tax?

To fall into the 40% tax bracket in the UK, your annual income must exceed £50,270. For the 2023/24 tax year, the income tax bands are as follows:

• 0% tax on income up to £12,570.
• 20% tax on income between £12,571 and £50,270.
• 40% tax on income between £50,271 and £125,140.
• 45% tax on income over £125,140.

It's important to note that only the portion of your income exceeding £50,270 is taxed at 40%. For example, if you earn £70,000 annually:

• First £12,570: Tax-free (Personal Allowance).
• Next £37,700 (£12,571 to £50,270): Taxed at 20% (Basic Rate).
• The remaining £19,730 (£50,271 to £70,000): Taxed at 40% (Higher Rate).

Individuals in the 40% tax bracket or higher must also pay additional tax on dividend income, savings interest, and capital gains.

How to Reduce Your Tax Bill in the 40% Tax Rate Bracket

If you’re paying tax bracket for 40, there are some ways to lower your taxable income and keep more of your earnings. 

• Pension Contributions: Contributing to a pension reduces your taxable income. You get tax relief at your highest rate, so a £100 contribution only costs £60 after tax.
• Gift Aid Donations: Donate to charity under Gift Aid, and the charity claims 20% tax relief. You can claim an extra 20% back on your Self-Assessment for donations.
• Tax-Free Investments (ISAs): Save or invest in an ISA (Individual Savings Account). Your money grows tax-free, so you avoid tax on any interest, dividends, or gains.
• Marriage Allowance (if eligible): If your partner earns below the Personal Allowance, they can transfer 10% of their allowance to you. This reduces your tax bill by up to £252 per year.
• Claim Work-Related Expenses: Claim tax relief for necessary work costs like uniforms, tools, travel, or professional fees. These deductions lower your taxable income and reduce your overall bill.
• Maximise Your Capital Gains Allowance: Spread out the sale of assets across multiple tax years to use your capital gains tax allowance. This reduces how much of your gain is exposed to higher tax rates.

Does the 40% Tax Band Change Every Tax Year?

The 40 tax bracket UK can change, but it doesn’t happen every year. The UK government reviews income tax thresholds during the annual Budget, deciding whether to adjust them based on inflation, public finances, or policy goals.

Currently, for the 2024/25 tax year, the higher rate tax band starts at £50,271 and runs up to £125,140.

If thresholds do change in the future, it could affect when you start paying 40% tax. For example, if the limit increases, you might stay in the 20% bracket for longer. 

How PHS Associates Help You

If you fall into the 40% tax bracket, managing your finances can be difficult. PHS Associates is here to help. They offer expert tax planning, personal accounting, and business consultancy services to optimise your income, reduce your tax bill, and keep you compliant with HMRC. 

Contact us at 0208 8611685 and email us at info@phs-uk.co.uk. Whether you need help with self-assessment, payroll, or strategic financial planning, their approach ensures you make the most of every opportunity while effectively managing your position within the 40 tax bracket UK.