In the United Kingdom, tax rates are based on income and are divided into different brackets. The 40% tax bracket is one of the highest tax brackets in the UK, with a high tax rate for individuals earning more than £50,270 as of 2023.

In this blog we will analyse the fundamentals of the 40% tax bracket, implications for taxpayers and effective strategies for lowering your tax liability.

What Is the 40% Tax Bracket?

As the name suggests, the 40% tax bracket applies a 40% tax deduction to an individual’s income. This tax bracket, also referred to as the higher rate tax band, deducts a significant portion of a taxpayer’s income.

Individuals with an annual income between £50,571 and £125,140 for the year 2023-24 will fall under the 40% tax bracket.

The impact of the 40% tax bracket is that taxpayers will be required to pay a significant portion of their income payable to HMRC. As a result, individuals within the 40% tax bracket will see a reduction in their disposable income that would otherwise go into savings, investments, or general day-to-day spending. This tax liability is sure to have a negative impact on your overall financial situation.

How does the 40% Tax Rate Bracket Work?

As explained earlier, the 40% tax rate bracket is applicable for individuals with an annual income greater than £50,571 and lower than £125,140. The 40% tax rate will be calculated for the portion of income that exceeds £50,270.

Let’s look at an example to understand how the 40% tax bracket works:

If your annual income is £70,000, only the amount above £50,270 will be subject to 40% tax; as opposed to your total income i.e. £70,000. The portion of your income that falls between £50,270 - £12,570 will be taxed at 20% as basic income. Any income below £12,570 will not be taxed as per Standard Personal Allowance rules. 

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

In order to fall within the 40%tax bracket, your annual income needs to exceed the basic rate income of £50,570. Any income you make above the basic rate income will be taxed at 40%. Any income that exceeds £125,141 will go into the additional income band and will be taxed at 45%. Here is a breakdown of tax bands and the respective taxes applicable.

For example, salary limits for 2023/2024 tax bands:

  • Standard Personal Allowance: 0% tax for income up to £12,570.
  • Basic Rate: 20% tax on earnings above £12,571 and up to £50,270.
  • 40% tax bracket – 40% tax on income between £50,271 and £125,140.
  • Additional Rate tax band – 45% tax on income over £125,110.

Earnings beyond £125,141 will be subject to taxation at the 45% additional rate tax band. Individuals paying at the 40% tax bracket and higher will be required to pay additionally for any dividend income, savings and capital gains.

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

Being subject to the 40% rate can result in higher tax payments. To avoid paying hefty taxes, there are a number of financial strategies that can be employed.

Making Tax-Free Investments: One way to lower your tax liability is to make investments that provide tax-free allowances, such as Individual Savings Accounts (ISA) or pension payments. These investments can help you reduce your taxable income and possibly even fall into a lower tax bracket. Make sure you notify HMRC about your investments so they adjust your tax code.

Making a Tax Relief Claim: If you qualify for certain tax reliefs such as charitable contributions, your taxable income and tax liability can be reduced. This is especially true for individuals who are working from home with a defined strategy and wherewithal to apply for tax reduction.

Salary Sacrifice: An additional option is to participate in your employer's salary sacrifice schemes. To lower your taxable income, you must give up a portion of your pre-tax income in exchange for perks such as childcare vouchers or cycle-to-work programmes.

Payments to a Pension: Making larger payments to a pension can also help lower your tax liability. Pension payments are not taxed; therefore significantly reducing your taxable income and possibly putting you in a lower tax bracket.

Making Use of Tax Deductions: If you own a buy-to-let property, you may be permitted to deduct certain expenses from your taxes, such as those connected to work or rental property. These can lower both your total tax liability and your taxable income.

Does the 40% Tax Band Change Every Tax Year?

The 40% tax rate is subject to change every tax year based on decisions made by the government in the budget announcement. Every year, during the budget announcement, the government states clearly the new fiscal year’s tax-free personal allowance and additional tax bands.

To determine how much tax you should pay and how you can save on taxes, you will first need to understand how the different tax brackets work. Upon understanding the fundamentals behind the different tax bands, you will be well on your way to optimizing your taxes in the best possible manner.

How Can Unicorn Accountants Help You?

In conclusion, the 40% tax bracket – for individuals earning between £50,270 and £125,140, as of 2023, is among the highest in the United Kingdom. If you are in this tax category, a significant portion of your income will go into taxes. If you find yourself within this tax bracket, it is imperative that you find strategies to lower your tax liability.

Understanding the nuances of tax laws can be a tightrope walk. To ensure that you get it right from the start, you should seek professional advice from a tax expert or financial advisor who can look into your specific circumstances. Unicorn Accountants, a leading tax accountant in London, has the expertise to guide you through the intricacies of the taxation system in the UK. You will be assured maximum tax benefits and well-planned decisions that improve your financial well-being.