What You Should Know About The 40 Tax Bracket

Do you pay 40% tax?  Even if you don’t do so now, there’s a strong chance that you will in the next few years.  2011 predictions from the Institute for Fiscal Studies suggest that up to 3.5 million more UK taxpayers will be paying 40% income tax by 2015.  Is this likely to affect you?

Increasing numbers of people are now in the 40% tax bracket and so are paying 40p in every £1 they earn over a certain amount.  Keep reading to find out everything you need to know about the 40% tax bracket.

Why are more people paying 40% tax?

There is one main reason that more people are paying 40% tax.  As the Chancellor, George Osborne, increases the tax free allowances – the amount you can earn without paying tax – to help low earners, he has been steadily reducing the threshold for paying 40% tax.  The idea is that higher earners pay more tax in order to ease the pain on people on low incomes.

Paul Johnson from the Institute of Fiscal Studies explains: “The only way of doing that in an affordable fashion is to bring more people into the higher-rate band and that actually carries on a trend which has been going for a very long time.

“It’s not so long ago that only about one in 20 taxpayers were paying the higher rate. We think that within three or four years that’s going to be one in four or one in five, so this is a very, very big change.

“In order to prevent higher-rate taxpayers from gaining, they [the Government] have reduced the point at which you start to pay higher rate tax, thereby bringing an extra three-quarters of a million people into higher rate tax.”

When you pay the 40% tax bracket

As we saw above, the point at which you start paying 40% tax in the UK has been gradually decreasing over the last few years.  The basic rate of tax has been applicable to:

  • The first £37,400 of your taxable income in tax year 2010/11
  • The first £35,000 of your taxable income in tax year 2011/12
  • The first £34,370 of your taxable income in tax year 2012/13

You will pay 40% tax on any taxable earnings above these amounts.

Don’t forget that your taxable income is the income left over after all your allowances and deductions have been taken into account.  For example, if you’re eligible for the full basic Personal Allowance in the 2011/12 tax year (£7,475) and you earn £40,000, you won’t pay any tax at 40%.  This is because your taxable income is only £32,525 – lower than the 40% tax threshold.

Remember also that you don’t pay 40% income tax on all your income if you earn more than the threshold.  You pay basic rate (20%) tax on part of your earnings and 40% tax on the amount above the threshold.

For example, if you earn £50,000 and are eligible for the basic Personal Allowance in the 2012/13 tax year, your tax would be £9,884, worked out as:

  • £8,105 at 0% (your Personal Allowance)
  • £34,370 at 20% (basic rate) = £6,874
  • £7,525 at 40% (higher rate) = £3,010

5 comments

  1. Steve says:

    And how is this affected if you have a company car?

  2. Mike says:

    Ca n you tell me when do they make the 40% tax demend and do they take your tax free sum

  3. paul says:

    My pay slip reads that i have earnt £38,000 this year so far. My next month wage is £6000 before tax will i have to pay 40% on my next pay????

  4. Tax Fix says:

    Colin – Of course!

    The basic Personal Allowance was:

    £6,475 in tax year 2010/11
    £7,475 in tax year 2011/12
    £8,105 in tax year 2012/13

  5. Colin says:

    In your article you have explained at what level of earnings you start paying 40% tax over the last few years. Can you let mus know what the Personal Allowance was in those years as well so we can check our tax is correct?

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