Index of the Article:
The Basics of the 40% Tax Bracket in the UK
The 40% tax bracket—also referred to as the Higher Rate tax band—is a key element of the UK tax system that affects millions of taxpayers. Understanding its details is crucial for anyone earning above the Basic Rate threshold. This section provides an in-depth explanation of how the Higher Rate tax works, the latest thresholds for 2025, and how these rules impact different types of income.
What is the 40% Tax Bracket?
In the UK, income tax is divided into three primary rates:
Basic Rate (20%): Applies to income up to a certain threshold.
Higher Rate (40%): Kicks in for income above the Basic Rate limit.
Additional Rate (45%): Applies to the highest earners.
The 40% tax bracket applies to taxable income within a specific range. This means you are taxed 40% on the portion of your income falling into this band.
Thresholds for the 40% Tax Bracket in 2025
As of 2025, the UK government has frozen income tax thresholds until April 2028, following announcements in the Autumn 2022 and 2024 budgets. Here’s a breakdown:
Rate | Income Range (2025) | Tax Rate |
Personal Allowance | £0–£12,570 (phased out for incomes > £100,000) | 0% |
Basic Rate | £12,571–£50,270 | 20% |
Higher Rate | £50,271–£125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Key Highlights for 2025:
The Higher Rate threshold starts at £50,271. This has remained unchanged since 2021, effectively pushing more taxpayers into higher bands due to inflation and wage growth.
The Personal Allowance of £12,570 is reduced by £1 for every £2 of income above £100,000, meaning individuals earning over £125,140 lose their allowance entirely.
How the 40% Tax Bracket Works
Let’s break it down with an example:
Example:
Samantha earns £60,000 annually.
Personal Allowance: £12,570 (tax-free).
Basic Rate: £50,270 – £12,570 = £37,700 taxed at 20%.
Higher Rate: £60,000 – £50,270 = £9,730 taxed at 40%.
Income Segment | Tax Rate | Tax Due |
£12,570 (Personal Allowance) | 0% | £0 |
£37,700 (Basic Rate) | 20% | £7,540 |
£9,730 (Higher Rate) | 40% | £3,892 |
Total Tax Payable | - | £11,432 |
In this case, Samantha’s effective tax rate is lower than 40% because only a portion of her income falls into the Higher Rate bracket.
Types of Income Subject to the 40% Tax Bracket
The Higher Rate band applies to various sources of income, including:
Employment Income: Salaries, bonuses, and commissions.
Self-Employment Income: Profits from running a business.
Rental Income: Profits from property letting, after allowable deductions.
Investment Income: Dividends and interest (with specific rules for each).
Dividend Tax and the 40% Bracket
Dividend income is taxed differently:
First £1,000 (2025 allowance): 0% (Dividend Allowance).
Higher Rate taxpayers: 33.75% on dividend income within this band.
For example, if you’re a Higher Rate taxpayer with £10,000 in dividends, the tax would be calculated as follows:
£1,000 (Dividend Allowance): 0% tax.
£9,000 × 33.75% = £3,037.50 in dividend tax.
Impact of Personal Allowance Reduction
For individuals earning more than £100,000, the gradual reduction of the Personal Allowance leads to an effective marginal tax rate of 60% on income between £100,000 and £125,140.
Example:
James earns £110,000.
His Personal Allowance is reduced by £1 for every £2 above £100,000: £110,000 – £100,000 = £10,000 ÷ 2 = £5,000.
Adjusted Personal Allowance: £12,570 – £5,000 = £7,570.
This adjustment increases the taxable portion of James's income, making his effective rate on this band significantly higher than 40%.
Real-Life Implications
Understanding the 40% bracket is essential for financial planning. Here are some real-life scenarios:
Salaried Professionals with Bonuses: A £10,000 bonus could push someone into the Higher Rate band. For example:
Current salary: £48,000 (Basic Rate).
Bonus: £10,000.
New taxable income: £58,000.
The portion above £50,270 (£7,730) will be taxed at 40%.
Rental Income: If rental profits push total income into the Higher Rate, landlords may face higher tax bills. Mortgage interest deductions are restricted for Basic Rate only, increasing the tax burden further.
Pension Contributions: Contributions to a pension scheme can reduce taxable income, potentially bringing some earnings out of the Higher Rate bracket.
FAQs Raised by Taxpayers
The Higher Rate band often leads to questions such as:
"Does this include all my income?" (Answer: Yes, including salary, investments, and rental profits).
"How can I reduce my taxable income?" (Answer: Pension contributions and charitable donations are common methods).
These nuances will be explored in subsequent sections.
This comprehensive understanding of the 40% tax bracket sets the stage for examining its broader implications and strategies for managing it.
How the 40% Tax Bracket Impacts Taxpayers
The 40% tax bracket isn’t just a number—it has real consequences for the finances of those earning above the Higher Rate threshold. From increased tax bills to the interplay of deductions and allowances, understanding how this bracket works in practice is essential for effective tax planning. This section explores the impact of the Higher Rate band on various taxpayer groups, addressing common scenarios, challenges, and opportunities for mitigation.
Who Falls into the 40% Tax Bracket?
The Higher Rate tax bracket applies to individuals whose taxable income exceeds £50,270 but is below £125,140. As of 2025, the government’s decision to freeze income tax thresholds until 2028 means that wage inflation is pushing more people into this band, even if their purchasing power hasn’t significantly increased. This phenomenon is known as “fiscal drag.”
Key Groups Affected:
Middle-Income Earners with Promotions or Bonuses:
Professionals earning around the threshold often find themselves pushed into the Higher Rate band by annual pay raises, bonuses, or other perks.
Dual-Income Households:
Couples with combined earnings over £100,000 may face challenges, particularly if they lose access to benefits like child benefit.
Self-Employed Individuals:
Those with fluctuating incomes may find portions of their profits taxed at 40% during good years.
The Marriage Allowance and Higher Rate Taxpayers
The Marriage Allowance, a benefit for couples, allows one partner to transfer up to £1,260 of unused Personal Allowance to their spouse. However, this only applies if the recipient is a Basic Rate taxpayer. Once a partner earns above £50,270, the Marriage Allowance becomes unavailable.
Example:
Jane earns £48,000, while her husband, Tom, earns £15,000. They can benefit from the Marriage Allowance, saving them £252 annually.
If Jane’s salary increases to £51,000, they lose this allowance, effectively reducing the benefit of her raise.
Child Benefit and the Higher Rate Threshold
Child benefit is another area where crossing into the 40% bracket creates complications. For families where one parent earns over £50,000, the High Income Child Benefit Charge (HICBC) applies, reducing the benefit by 1% for every £100 earned above this threshold. Once income reaches £60,000, the benefit is entirely clawed back.
Example:
Sarah and Alex have two children and receive £1,885 in child benefit annually.
Sarah earns £49,000, so no charge applies.
A pay raise to £55,000 means 50% of the child benefit is reclaimed through HICBC.
If her income reaches £60,000, they lose the full amount.
The Role of Pension Contributions
One of the most effective tools for managing Higher Rate tax is pension contributions, as these reduce taxable income and potentially bring earnings below the 40% threshold. Contributions also attract tax relief at the taxpayer’s highest marginal rate.
Example:
Mark earns £60,000 and contributes £8,000 to his pension. With tax relief, the government adds £2,000, making his total contribution £10,000.
His taxable income is now £60,000 – £10,000 = £50,000, reducing his Higher Rate tax liability.
For Mark, this strategy not only lowers his immediate tax bill but also boosts his retirement savings.
Salary Sacrifice Schemes
Employers often offer salary sacrifice arrangements, enabling employees to exchange a portion of their salary for non-cash benefits like pensions, childcare vouchers, or electric cars. These schemes reduce taxable income, potentially avoiding the Higher Rate band altogether.
Example:
Emily earns £55,000 and opts for a salary sacrifice arrangement for an electric car worth £5,000 annually.
Her taxable income is now £50,000, saving her from 40% tax on £5,000.
This strategy not only saves tax but can also reduce National Insurance Contributions (NICs).
The Tapering of Personal Allowance
For individuals earning over £100,000, the tapering of the Personal Allowance creates an effective marginal tax rate of 60% on income between £100,000 and £125,140. This is because every £1 over £100,000 reduces the Personal Allowance by 50p, exposing more of the income to taxation.
Example:
Lisa earns £110,000:
Her Personal Allowance is reduced to £12,570 – £5,000 = £7,570.
This increases her taxable income, meaning £10,000 is effectively taxed at 60%.
For high earners, pension contributions or charitable donations can help reduce this impact.
Impact on Self-Employed Individuals
The self-employed are uniquely affected by the 40% tax bracket, as their taxable income is calculated after deducting allowable expenses but before considering personal allowances. High profits during successful years can push self-employed individuals into the Higher Rate band, significantly increasing their tax bills.
Example:
David runs a small business and earns £55,000 in profit.
He pays 20% tax on the first £37,700 of taxable income.
The remaining £17,300 is taxed at 40%, costing £6,920.
Planning for irregular income and setting aside funds for tax is crucial to avoid financial strain.
Investment Income and the 40% Tax Bracket
Investment income, such as dividends and interest, is also subject to the Higher Rate band. However, these forms of income have unique allowances:
Dividends:
£1,000 is tax-free (Dividend Allowance).
Higher Rate taxpayers pay 33.75% on dividends above this limit.
Savings Interest:
The Personal Savings Allowance is reduced to £500 for Higher Rate taxpayers.
Example:
Sophie, a Higher Rate taxpayer, earns £5,000 in dividends and £1,000 in interest:
Dividends: £1,000 (allowance) + £4,000 × 33.75% = £1,350 tax.
Interest: £500 (allowance) + £500 × 40% = £200 tax.
Property Income and Mortgage Interest Relief
Landlords earning rental income must also consider the implications of the 40% bracket. Since mortgage interest relief is limited to the Basic Rate, landlords in the Higher Rate band face higher effective tax bills.
Example:
Rachel earns £55,000 from employment and £10,000 in rental profits:
Her total income is £65,000, with £14,730 taxed at 40%.
Mortgage interest relief is restricted to 20%, increasing her taxable income.
Losing Benefits and Allowances
Crossing into the 40% band often results in losing access to various benefits, including:
Marriage Allowance (as mentioned earlier).
Reduced child benefit via HICBC.
Lower Personal Savings Allowance.
This creates a need for proactive planning to minimize these losses.
Practical Challenges
Tax Code Adjustments: Many taxpayers face incorrect tax codes due to changes in income levels, leading to underpayment or overpayment of taxes.
Increased Complexity: Falling into the 40% band often requires a better understanding of allowable deductions, reliefs, and strategies to mitigate tax liability.
Strategies for Managing the 40% Tax Bracket
Being in the 40% tax bracket might sound daunting, but with thoughtful planning and smart strategies, you can reduce your tax burden and maximize your financial benefits. This section focuses on practical approaches to manage and potentially minimize the impact of the Higher Rate tax band for UK taxpayers in 2025.
Tax-Efficient Strategies to Reduce Taxable Income
1. Maximize Pension Contributions
Pension contributions are one of the most effective ways to lower taxable income. Contributions to a pension scheme not only reduce your income subject to tax but also attract tax relief at the highest rate you pay.
How it Works:
Contributions are deducted before your income is taxed.
Higher Rate taxpayers receive 40% tax relief, effectively boosting the value of their contributions.
Example:
If you earn £60,000 and contribute £8,000 to a pension scheme, your taxable income is reduced to £52,000, saving you 40% tax on the £8,000 (£3,200 in savings).
Tip: Check with your employer if they offer a salary sacrifice pension scheme, which allows you to contribute pre-tax, saving on both income tax and National Insurance Contributions (NICs).
2. Utilize Charitable Donations
Under the Gift Aid scheme, donations to registered charities can reduce your tax liability. The donation amount is considered as gross (including basic rate tax), and Higher Rate taxpayers can claim back the difference between their rate and the Basic Rate.
Example:
You donate £1,000 to a charity. The charity claims back £250 in Gift Aid, making the gross donation £1,250.
As a Higher Rate taxpayer, you can claim an additional 20% of £1,250 (£250), reducing your tax bill.
3. Consider Salary Sacrifice Schemes
Salary sacrifice schemes allow you to exchange part of your pre-tax salary for non-cash benefits, reducing your taxable income. Popular schemes include:
Pension contributions.
Electric vehicles (EVs): Using salary sacrifice for EV leases can offer significant tax savings.
Childcare vouchers (if enrolled before October 2018).
Example:
If you earn £55,000 and opt for a salary sacrifice EV worth £5,000 annually, your taxable income drops to £50,000, saving £2,000 in Higher Rate tax.
4. Manage Your Investment Income
Investment income such as dividends and interest can push you into the Higher Rate tax band. Strategies include:
Maximizing ISA allowances: Income from ISAs (up to £20,000 per year) is completely tax-free.
Adjusting investments to defer or spread income over multiple years, keeping taxable income below thresholds.
Tip: Reinvest income rather than taking it out, especially for dividends, to avoid higher rates of tax.
Planning for Additional and Hidden Tax Impacts
1. Avoiding the High-Income Child Benefit Charge (HICBC)
If you or your partner earns over £50,000, the HICBC applies, reducing the value of child benefit received. By lowering your taxable income through pension contributions or salary sacrifice, you can avoid or reduce this charge.
Example:
A parent earning £55,000 can contribute £5,000 to their pension to bring their taxable income to £50,000, avoiding the HICBC entirely.
2. Managing the Personal Allowance Taper
Once your income exceeds £100,000, your Personal Allowance is gradually reduced, creating an effective marginal tax rate of 60%. Reducing your taxable income through deductions or reliefs can help retain this allowance.
Example:
If you earn £110,000, contributing £10,000 to a pension would restore your full Personal Allowance and save you from paying the 60% marginal rate on the £10,000.
Leveraging Tax-Efficient Investments
1. Venture Capital Trusts (VCTs)
VCTs offer income tax relief at 30% on investments up to £200,000 per year. They are high-risk but can provide significant tax savings for those in the Higher Rate band.
2. Enterprise Investment Scheme (EIS)
EIS investments allow you to claim 30% income tax relief on investments up to £1,000,000 annually. These schemes also offer capital gains tax relief and loss relief, making them attractive for high earners.
3. Seed Enterprise Investment Scheme (SEIS)
For smaller investments, SEIS offers income tax relief of 50% on up to £100,000 annually, with similar benefits to the EIS.
Tax Planning for Property Owners
1. Mortgage Interest Relief for Landlords
While mortgage interest relief is capped at the Basic Rate (20%), landlords in the Higher Rate bracket can still reduce their tax liability through deductions for allowable expenses.
2. Rent-a-Room Scheme
The Rent-a-Room scheme allows you to earn up to £7,500 annually from renting a furnished room in your home tax-free. This income does not affect your tax bracket.
Mitigating the Effects of Fiscal Drag
With thresholds frozen until 2028, many taxpayers will find themselves in the 40% bracket due to wage inflation—a phenomenon known as fiscal drag. Strategies to mitigate this include:
Reviewing your tax code annually to ensure it accurately reflects your income and deductions.
Proactively managing bonuses or irregular income to spread it across tax years where possible.
Utilizing Professional Advice
For those with complex financial situations, consulting a tax advisor can be invaluable. Professionals can help:
Identify overlooked reliefs and deductions.
Optimize your income structure (e.g., splitting income with a spouse).
Ensure compliance while minimizing your liability.
Key Considerations for Business Owners
Business owners and directors have unique opportunities for tax efficiency:
Paying dividends instead of salary: Dividends are taxed at lower rates, especially for amounts within the Basic Rate band.
Company pension contributions: These can be made as business expenses, reducing corporation tax while benefiting the individual.
Employee benefits: Providing non-cash benefits like private healthcare or cars through the company can lower taxable income.
Example:
A director earning £80,000 opts to take £40,000 as salary and £40,000 as dividends. This approach reduces NICs and leverages the lower tax rate on dividends.
Common Mistakes to Avoid
Ignoring Allowances and Reliefs: Many taxpayers miss out on valuable allowances like Gift Aid or ISA limits.
Failing to Plan for Tax Bills: High earners, especially the self-employed, should set aside funds for future tax liabilities.
Misusing Salary Sacrifice: Ensure salary sacrifice arrangements do not inadvertently reduce statutory entitlements like maternity pay.
Tools for Higher Rate Tax Planning
Several online tools and resources can assist taxpayers in navigating the 40% tax bracket:
HMRC tax calculators: Estimate your liability based on income and allowances.
Tax relief trackers: Help monitor pension contributions and charitable donations.
Professional accounting software: Streamline record-keeping and ensure accuracy.
By applying these strategies, taxpayers can significantly reduce the financial impact of the Higher Rate tax band, preserving more of their income for personal and family goals. Whether through proactive planning, smart investment choices, or leveraging tax-efficient schemes, understanding and managing the 40% tax bracket ensures a brighter financial outlook.
Audio Summary of All the Most Important Points
Summary of All the Most Important Points Mentioned In the Above Article
The 40% tax bracket, or Higher Rate, applies to taxable income between £50,271 and £125,140 in the UK for 2025.
The Personal Allowance of £12,570 is reduced for incomes above £100,000, leading to an effective 60% marginal tax rate.
Bonuses, dividends, rental income, and other sources contribute to taxable income and can push individuals into the Higher Rate bracket.
Tax-saving strategies include maximizing pension contributions, using salary sacrifice schemes, and donating to charities under Gift Aid.
Self-employed individuals can lower their taxable income by claiming allowable expenses and making pension contributions.
The freeze on tax thresholds until 2028 increases the risk of fiscal drag, pushing more taxpayers into the 40% bracket.
Falling into the 40% bracket can impact child benefit eligibility through the High Income Child Benefit Charge for incomes above £50,000.
Capital gains, investment income, and employer benefits in kind are added to taxable income and may increase Higher Rate tax liability.
Tax-efficient investments like ISAs, VCTs, and EISs offer opportunities to minimize tax exposure for Higher Rate taxpayers.
Professional tax planning, including income deferral and accurate use of allowances, helps mitigate the financial impact of the 40% tax band.
FAQs
Q1: What happens if your income fluctuates and sometimes falls into the 40% tax bracket?
A: If your income varies, you might fall into the 40% tax bracket in some years and not in others. HMRC bases tax calculations on your total income for the tax year, so managing your income through allowances, deductions, or spreading earnings across tax years can help reduce liability.
Q2: Does receiving a bonus push you into the 40% tax bracket?
A: Yes, bonuses are added to your taxable income for the year. If this pushes your total income above £50,270, you may fall into the 40% tax bracket for the portion above this threshold.
Q3: Are student loan repayments affected if you fall into the 40% tax bracket?
A: Yes, higher earners pay a larger percentage of their income toward student loans. For Plan 2 loans, you repay 9% of income over £27,295, and repayments are calculated after tax, so being in the 40% bracket can increase your repayment amounts.
Q4: How does the 40% tax bracket impact the Marriage Allowance?
A: The Marriage Allowance is only available if your income is within the Basic Rate band. If you earn over £50,270, you lose eligibility for this allowance.
Q5: Can you reduce your income below the 40% tax bracket with business expenses?
A: Yes, if you are self-employed or own a business, claiming allowable expenses can reduce your taxable profit, potentially bringing your income below the Higher Rate threshold.
Q6: Do rental losses from previous years affect the 40% tax bracket?
A: Yes, if you have carried forward rental losses from previous years, they can be used to offset rental income, potentially reducing your taxable income and helping you stay within the Basic Rate band.
Q7: How do capital gains interact with the 40% tax bracket?
A: Capital gains are taxed separately, but they are added to your total income to determine your tax band. If the combined amount pushes you into the 40% bracket, your gains above the annual exemption may be taxed at 20% instead of 10%.
Q8: Does the 40% tax bracket apply to freelance and gig economy workers?
A: Yes, income from freelance or gig economy work is taxable and added to other sources of income to determine your overall tax bracket. Keeping track of allowable expenses can help reduce your taxable income.
Q9: Can you offset pension contributions against the 40% tax bracket for self-employed individuals?
A: Yes, self-employed individuals can contribute to personal pension schemes and claim tax relief at the Higher Rate on their tax return, effectively reducing their taxable income.
Q10: How does the 40% tax bracket affect company directors?
A: Company directors who draw both salary and dividends need to consider how their combined income interacts with tax thresholds. While dividends are taxed at a lower rate, they count toward your overall taxable income and could push you into the 40% bracket.
Q11: Does inheritance income count toward the 40% tax bracket?
A: No, inheritance itself is not taxable as income, but if the funds generate taxable income, such as interest or rental profits, that income will be subject to the relevant tax bracket, including 40%.
Q12: How does being in the 40% tax bracket affect your eligibility for government benefits?
A: Some benefits, such as Child Benefit, are reduced or eliminated for Higher Rate taxpayers. Other means-tested benefits could also be affected if your income surpasses certain thresholds.
Q13: Do dividend distributions from investments push you into the 40% tax bracket?
A: Yes, dividend income is added to your other taxable income. If this total exceeds £50,270, you’ll pay 33.75% tax on dividends within the Higher Rate band.
Q14: Can you change your tax code if your circumstances push you into the 40% bracket unexpectedly?
A: Yes, if your circumstances change, you can contact HMRC to adjust your tax code and ensure you’re paying the correct amount of tax.
Q15: Is it possible to spread income over multiple tax years to avoid the 40% bracket?
A: Yes, income-splitting strategies, such as deferring bonuses or timing self-employment invoices, can help spread taxable income across years and potentially keep you within the Basic Rate band.
Q16: Does the 40% tax bracket include foreign income?
A: Yes, UK residents are taxed on their worldwide income. If foreign income pushes your total income above £50,270, the 40% rate will apply.
Q17: How does the 40% tax bracket affect NICs (National Insurance Contributions)?
A: NICs have their own thresholds and rates. For employees, NICs are charged at 12% on earnings up to £50,270 and at 2% on income above this level. The 40% tax bracket does not directly impact NIC rates.
Q18: Are redundancy payments affected by the 40% tax bracket?
A: Redundancy payments up to £30,000 are tax-free. Amounts above this threshold are subject to income tax and could push you into the 40% tax bracket.
Q19: Do employer benefits in kind count toward the 40% tax bracket?
A: Yes, the taxable value of benefits in kind, such as company cars or private medical insurance, is added to your total income and could move you into the Higher Rate band.
Q20: Can you use investment losses to reduce income in the 40% bracket?
A: Yes, capital losses can be offset against capital gains, reducing your overall tax liability. However, they cannot be used to offset income for determining your tax bracket.
Disclaimer:
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, My Tax Accountant makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk.
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, My Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
Comments