Learn about the 40% tax bracket, how much you can earn before paying it and ways to avoid falling into the higher rate tax band.
This guide is for taxpayers in England & Wales, including sole traders. Different tax brackets apply if you are a Scottish taxpayer.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What is the UK 40% Tax Bracket?
The 40 per cent tax bracket affects individuals in England and Wales who earn taxable income between £50,270 and £100,000.
Here’s an example:
You earn a gross income of £60,000 a year. You’ll pay income tax of £11,432 which is calculated as:
- 0% on the first £12,570
- 20% on the next £37,700
- 40% on the remaining £9,730
DID YOU KNOW
The 40% tax bracket is also known as the higher rate tax bracket. It’s one of 3 tax brackets in England & Wales that kick in once your taxable income exceeds the personal allowance. The three brackets are:
- Basic Rate 20%
- Higher Rate 40%
- Additional Rate 45%
When Do You Start Paying 40% Tax?
You start paying 40% tax once your income goes above the personal allowance of £12,570 and the basic rate band of £37,700. That means you can earn a gross income of £50,270 before falling into the higher rate tax threshold.
How to Avoid the 40% Tax Bracket?
By reducing your taxable income you can avoid the 40% tax bracket, legally. Here are three ways to stop yourself from falling into the higher rate threshold:
Pension Contributions
In simple terms, pension contributions are deducted from your gross income for tax reasons. That means you are taxed on your income minus pensions contributions (up to a maximum of £60,000 for the tax year 2023-24). So by increasing your pension contributions you’ll reduce your income falling into the 40% tax bracket or avoid it altogether.
DON’T FORGET
You’ll need to transfer cash into your pension to be eligible for the reduction which reduces your take-home pay.
Claiming Expenses
Claiming expenses reduces your taxable income and the amount of income being hit by the higher rate threshold.
If you are a sole trader make sure you are tracking all your allowable business expenses so you maximise your claim when you complete your self-assessment tax return.
Read this guide to learn how to keep records and track expenses when you’re self-employed.
If you are employed by someone and are paying business expenses that you are not being reimbursed for, then check whether you are eligible to claim tax relief on expenses through your payslip.
Read this guide to check whether you’re able to claim tax relief on employment expenses and how to do it.
Charitable Donations
If you’re a higher-rate taxpayer donating to charity through gift aid will bring down your income tax bill. Not only is the charity able to claim an extra 25p for every £1 donated but if you’re a 40% taxpayer you’ll be able to claim the difference between the basic rate and the higher rate value of your donation to increase your basic rate tax band.
Here’s an example:
You donate £1,000 to charity and are a higher-rate taxpayer. The charity receives £1,250 under gift aid. You can claim the difference between the basic rate of 20% and the higher rate of 40% on the full £1,250 of £250 (20% x £1,250) on top of your basic rate band.
In other words, you’ll be able to earn up to £50,520 (£50,270 + £250) before paying 40% tax.
You can claim your charitable donations on a tax return if you already fill one in. Alternatively, if you are employed and are not registered for self-assessment, you can contact HMRC and ask them to change your tax code so you will receive tax relief through your payslip.