40% Tax Bracket in the UK: Threshold Rates and How to Reduce It?

Whether you are a salaried employee, self-employed, or earning from multiple sources, you may observe your income grow and fall in the volatile income scenarios. This makes it essential to know how much of your income goes to tax and what income tax thresholds are in the UK. If you fall under the 40% tax bracket, the high-rate tax band, you need to analyze your income sources and utilize tax-saving strategies with tax accounting.  

But before that, what does the 40 tax bracket mean? And more importantly, when do you pay 40% tax? To make it understandable, we have developed this insightful blog covering the essentials of the 40 tax bracket 2024. Let’s move forward and look into it. 

What is the 40% Tax Bracket?

Income tax rates in the UK are assessed annually and differ depending on income thresholds. The 40% tax bracket is part of the higher-rate tax band and applies to those residing within its borders who earn over £50,270 annual earnings. When you are earning above the threshold amount, your income is taxed at 40%, but only the portion over a certain threshold is subject to this tax rate based on an initial (20%) rate as well as an additional (45%). Make sure you have your tax reference number to pay your tax liability. 

For the 2024/2025 tax year in the UK, here is how the tax bands are structured:

Tax Band	Tax Income Range	Tax Rate
Personal Allowance	£12,570	0%
Basic Rate	£12,571 to £50,270	20%
Higher Rate (40% tax bracket)	£50,271 to £125,140	40%
Additional Rate	Over £125,140	45%

Also Read: Why Do You Need a Tax Identification Number UK? (Explained)

When Do You Pay 40% Tax?

You pay a 40% tax on the portion of your income that falls between  £50,271 and £125,140. For example, if your total income is  £70,000, you will pay 0% on the first £12,570 as it does not levy any taxes. You will pay 20% on the income between £12,571 and £50,270. And the remaining £19,730 will be taxed at 40%. In simple words, only the income within the 40% band is taxed at 40%, not your entire salary. 

The HMRC collects and levies these direct taxes on behalf of the government. They are subsequently utilized to fund other public programs, such as National Health programs (NHS) and welfare projects. 

How to Reduce Your 40% Tax Liability?

If your income comes under the higher threshold of the 40 tax bracket, there are certain options for you to reduce the tax liability. Here are a few considerations:

1. Pension Contributions

Contributions to a pension scheme (like a workplace pension or personal pension) are tax deductible. You can reduce the taxable income by increasing the contributions to such schemes. This offers two benefits: lowering the tax burden and securing your financial future. For example, if you earn £60,000 and contribute £5,000 to your pension, only £55,000 will be taxed. You can also receive tax relief at 40%, meaning the government contributes additional money to your pension pot. 

2. Charitable Donations

Another way to lower the taxable income is to extend your basic rate band through gifts and charitable donations. For every £1 you donate, the charity receives £1.25. Moreover, you can claim back the difference between the 20% and 40% rates through self-assessment. 

3. Deposit Money in Savings Accounts 

There are no interests or dividends for investments in the savings accounts. So, this is also a good option to reduce taxable income by depositing more into your savings accounts. For example, if you are married or in a civil partnership, you can transfer assets or savings to your spouse, who falls under a lower tax band, to reduce your overall household liability. This is especially useful if one partner is not using their full personal allowance or is below the higher-rate threshold. 

4. Salary Sacrifice 

If your salary goes beyond the income threshold of £50,271, you can explore a few salary sacrifice options to reduce taxes.  For example, you exchange part of your salary for benefits like an electric car scheme. Moreover, you can directly talk to your employer for other non-taxable benefits like childcare or other such options.

Salary sacrifice allows you to exchange part of your salary for non-cash benefits such as:

• Additional pension contributions
• Cycle-to-work schemes
• Childcare vouchers 

Also Read: Retained Earnings: Explanation, Formula, and Importance for Businesses

Why Is It Important to Understand the 40% Tax Bracket? 

For UK residents earning higher incomes, remaining within the 40 tax bracket is of paramount importance. In fact, knowing how this works is especially crucial if you are earning above the basic rate threshold. Here is why it is important to understand the 40 tax brackets:

1. Avoid Overpaying or Underpaying Tax

Without understanding how tax bands function, you could end up overpaying or underpaying tax, which could lead to costly consequences such as:

• Overpaying can reduce your take-home earnings.
• Failure to comply could result in unexpected charges or penalties from HMRC in the future.
• Misreporting income or allowances can trigger HMRC reviews, causing delays in tax refunds or additional scrutiny of your finances.

2. Smarter Financial Planning

Once you enter a higher rate bracket, your net income begins to rapidly diminish due to increasing taxation rates. So, understanding the 40 tax bracket can:

• Helps you manage and adjust your budget realistically. 
• Assist in planning for pension contributions, investments, or major purchases according to your needs with ease using this program.
• Encourage planning your long-term financial goals to minimize tax increases. 

3. Take Advantage of Tax Reliefs and Allowances

When you are in the 40% bracket, you are eligible for tax reliefs that can reduce your taxable income, such as:

• Pension tax relief at a higher rate.
• Gift Aid extensions to the basic rate threshold.
• Certain business expenses or charitable donations.

4. Prevent Losing Your Personal Allowance: 

If your earnings surpass £100,000, your personal allowance (£12,570) begins to decrease until reaching £125,140. This increases your marginal tax rate to 60% on earnings between those two points. Hence, knowing the tax bracket can:

• Motivate you to make strategic pension contributions or investments. 
• Help you avoid inadvertently losing your full allowance. 
• Enable better timing of income, bonuses, or dividends to minimize tax liability within a given tax year.

5. Enables Better Use of Tax-Free Tools: 

If you are in the 40 tax bracket, you can use the tax-efficient investments like:

• Individual Savings Accounts, commonly referred to as ISAs, offer individuals tax advantages when investing their savings.
• Venture Capital Trusts (VCTs) offer another form of venture investment.
• Enterprise Investment Schemes (EIS)

Is the 40% Tax Applied to All Your Income?

One of the most common misconceptions about the 40 tax bracket is the belief that once you cross the threshold, your entire income is taxed at 40%. However, that is not true. The UK uses a progressive tax system, which means your income is taxed in portions called “bands” with each band taxed at a different rate. 

This simply means that the only income that falls within the higher-rate band is taxed at 40%. Let’s understand it with an example of how tax is calculated on £70,000 income. 

Suppose your annual income is £70,000. Here is how to break it down:

• First  £12,570 comes under the personal allowance: 0% tax
• Next  £37,700 is a basic rate that is taxed at 20%: £7,540
• The remaining £19,730 falls under the higher tax rate bracket at 40%: £7,892
• Total tax paid = £15,432, which is far less than 40% of your entire income.

Also Read: Payslips Explained: Components, Importance, and Everything You Must Know About

Conclusion

To conclude, if you want to manage your finances efficiently, it is important to understand how the 40 tax bracket operates within the UK in 2024. Although the 40 percent may sound costly, understanding its working enables you to better manage your earnings. 

Keep in mind that you don’t have to pay 40% tax on all of your income; there are ways to reduce it. You can take advantage of tax-free investments, contribute to pension plans or remain informed on tax laws. 

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