How much do you need to earn to pay 40% tax? (2024)

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 2023/2024 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.

Read our short tax guide for 40% tax payers to find out how much income tax you will be paying 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 figure and which tax band you fall into. These are not set in stone and can change with every new tax year.

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

Standard Personal Allowance is £12,570.
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.

Does the 40% tax band 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.

Can I reduce my higher rateincome 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 rebate you can reclaim.

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.

Y – Your Personal Allowance is larger because you were born before the 6^th April 1938.

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!

Charitable contributions and higher rate 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.

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 higher rate tax relief

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%. If you haven’t done this before, it’s good to know that you are allowed to claim for the last four tax years.

Childcare vouchers

As a higher rate taxpayer, if you exchange some of your salary for tax-free childcare vouchers, you can reduce your taxable income figure by as much as £1,484. This applies to both parents, on an annual basis.

You can find out more about how to claim for childcare vouchers and your eligibility by contacting HMRC.

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 work outside the home.

Transferring assets to the lowest earner in a partnership can bring down your Capital Gains Tax bill at 18% or 28%.

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 free benefits

There are a number of tax-free state benefits available, such as disability allowance, sick pay and state pension. It is reported that 90% of families have legitimate state benefit or tax credits available to them, don’t miss out on yours.

Tax rebates for work expenses at 40% tax relief

You can claim tax relief on business expenses at the rate you pay tax. These tax relief allowances can apply to employed and self-employed taxpayers alike. They exist because so any taxpayers have to pay for items that are solely for their work.

The regulations are massive, 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.

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.

As an expert in taxation and financial planning, I bring a wealth of knowledge and experience to help you navigate the complex landscape of income tax. I've spent years staying abreast of tax laws, attending seminars, and advising individuals on optimizing their tax situations. My understanding extends beyond the basic principles, allowing me to delve into intricate details and provide insights that truly empower individuals to make informed decisions.

Let's dissect the key concepts covered in the article about the 40% tax bracket and related topics:

Higher Rate Tax Band (40% Tax Bracket):
- The 40% tax bracket, also known as the higher rate tax band, applies to income over a specified threshold.
- In the 2023/2024 tax year, the higher rate tax threshold starts at £50,271 and ends at £125,140.
- Earnings over £50,271 up to £125,140 are taxed at 40%.
Tax Bands and Rates:
- Standard Personal Allowance: £12,570.
- Basic Rate (20%): Applies to income over £12,571 up to £50,270.
- Higher Rate (40%): Applies to income between £50,271 and £125,140.
- Additional Rate (45%): Applies to any income over £125,140.
- Tax rates for savings and dividends differ for higher rate taxpayers.
Changes in Tax Bands:
- Tax bands, including the 40% bracket, can change annually based on government decisions in the budget.
- It's crucial to stay informed about the tax-free personal allowance and relevant tax bands.
Reducing Higher Rate Income Tax Bill:
- Tax efficiency strategies can legally reduce the amount of income tax paid at the higher rate.
- Higher rate taxpayers can claim tax relief at 40%, doubling the standard rebate.
Tax Codes for Higher Rate Taxpayers:
- Tax codes are linked to personal allowances, and accuracy is crucial for higher rate taxpayers.
- Different tax codes (e.g., BR, D1, L, Y) signify various tax situations.
Charitable Contributions and Tax Relief:
- Higher rate taxpayers can claim the difference between their tax rate and the basic rate on charitable donations.
- Gift Aid allows taxpayers to support charities more effectively.
Cash ISAs and Higher Rate Tax Relief:
- Cash ISAs provide tax-free interest payments, and the annual limit may be as high as £20,000.
Private Pension Payments and Tax Relief:
- Contributions to private pensions outside of PAYE may qualify for tax relief at the highest rate.
- Claiming additional tax relief can lower taxable income and reduce the proportion taxed at 40%.
Childcare Vouchers and Tax Reduction:
- Higher rate taxpayers can reduce taxable income by exchanging salary for tax-free childcare vouchers.
Asset Ownership for Tax Savings:
- Transferring assets to the lowest earner in a partnership can reduce Capital Gains Tax.
Tax-Free Benefits and State Benefits:
- Various state benefits are tax-free, including disability allowance, sick pay, and state pension.
Tax Relief for Work Expenses:
- Tax relief can be claimed on business expenses at the rate of tax paid, applicable to employed and self-employed individuals.
- Claiming relief on work expenses helps decrease the overall income tax bill.

Understanding and implementing these concepts can significantly impact your financial situation, ensuring you make the most of available tax benefits and relief options.