Smart Ways To Plan Around The 40 Tax Threshold In The UK

Many contractors, freelancers, landlords and SME owners find themselves unexpectedly crossing the 40 tax threshold and paying more tax than anticipated. Understanding how the 40 tax threshold operates is essential for managing taxable income and navigating the higher income tax bracket effectively. In the UK the term “higher rate tax band” refers to the portion of income taxed at 40 % once your earnings exceed a specific threshold. In this article we will explain what the 40 tax threshold means, when you start paying 40 % tax, how much you can earn before hitting it, how we approach planning around it, and smart strategies to stay ahead of the higher income tax bracket.

What exactly is the 40 tax threshold in the UK?

The 40 tax threshold describes the point at which your taxable income begins to be taxed in the higher rate tax band of 40 %. For the tax year 2024/25 the higher rate applies to taxable income above £50,270 and up to £125,140 in England, Wales and Northern Ireland. (GOV.UK) It is important to note that hitting the 40 tax threshold does not mean all your income is taxed at 40 %. Only the portion of your income that falls within the higher income tax bracket is taxed at the 40 % marginal rate.

In other words, if your earnings mean your taxable income exceeds the 40 tax threshold, the excess is taxed at 40 %, the marginal rate on that slice of income, while income below that remains in lower tax bands. This clarifies the link between the 40 tax threshold UK and the terms higher rate tax band or higher income tax bracket , they refer to the same concept of the tax-band where 40 % applies.

Getting this right matters especially for freelancers, contractors, SME owners and landlords whose earnings may fluctuate. When taxable income crosses the 40 tax threshold you may pay significantly more tax on each additional pound earned. Failure to plan around this can reduce take-home pay, erode margins, and impact investment or growth decisions. Recognising the 40 tax threshold early gives you space to implement tax-efficient strategies and avoid surprises.

When do you pay 40% tax and how does the 40 tax threshold work for different income streams?

Understanding the 40 tax threshold starts with knowing when you pay 40% tax and how the 40% tax bracket works across different income streams. The tax year in the UK runs from 6 April to 5 April of the following year.
When your taxable income (that is, your income after allowable expenses, reliefs and personal allowance) moves into the higher rate tax band, you begin paying tax at a marginal rate of 40% on the portion that lies in that band. Many people mistakenly think once they cross the threshold all income is taxed at 40%, but that is not correct: only the part above the threshold is taxed at 40% (the marginal rate).

Which income streams count towards hitting the threshold?

The 40% tax bracket applies to your combined taxable income from multiple sources. For contractors, freelancers, SME-owners and landlords the key income streams include:

• Salary or wages from employment
  
• Profits from self-employment or contracting
  
• Rental income from property
  
• Dividend income (though dividends are taxed differently, they still feed into your total taxable income for threshold purposes)

Because many taxpayers have more than one income stream, it is entirely possible to cross the 40 tax threshold UK without realising if side-hustle income, rental profit or dividends push your total taxable income into the higher rate tax band.

Example calculation of how 40% tax works

Say you are a freelancer or contractor and your total taxable income for the tax year is £75,000. Let’s walk through the calculation:

1. The personal allowance is £12,570, this portion is taxed at 0%. (GOV.UK)
   
2. The next slice up to the basic rate limit (up to £50,270) is taxed at 20%. So the taxable income from £12,571 to £50,270 is taxed at 20%.
   
3. The remaining part (in this example £75,000 minus £50,270 = £24,730) falls into the 40% higher rate tax band. That £24,730 is taxed at 40%.
   Thus, you pay basic rate tax on the portion up to the higher rate threshold and then 40% tax on the slice above that threshold. This shows how the 40 tax threshold operates in practice.
   

The link between “higher rate tax band”, “higher income tax bracket” and marginal tax rates

In tax-planning terms, the “higher rate tax band” is the portion of taxable income where the 40% rate applies. Casual discussion often refers to the “higher income tax bracket” when meaning the same thing, but technically “higher income tax bracket” may refer more broadly to any band above the basic rate. Because the system uses marginal tax rates, moving into the higher rate tax band does not increase the tax rate on your entire income, only on the portion above the threshold. That distinction is vital for planners working with freelancers, contractors, SMEs and landlords who have multiple income streams.

READ RELATED ARTICLE: UK Personal Tax Allowance 2025/26: Key Changes & Guide

How much can I earn before I pay 40% tax and what is the higher rate tax threshold?

A frequent question for business owners, freelancers, contractors and landlords is “how much can I earn before I pay 40% tax” and “what is the higher rate tax threshold?”.

What is the current higher rate threshold?

For the tax year 2024/25 in England, Wales and Northern Ireland your taxable income above £50,270 is subject to the 40% rate in the higher rate tax band.
Because you also have the personal allowance (£12,570 tax-free), some people mistakenly believe the 40% tax bracket starts at around £37,000. That confusion emerges because £50,270 less the personal allowance equals roughly £37,700 can give a false impression. But the correct way to view it is your taxable income must exceed the higher rate threshold (£50,270) for the 40% higher rate to apply.

Are there regional differences?

Yes. If you are resident in Scotland your income tax bands differ. For example Scottish taxable income bands show a different threshold and rate structure. It is therefore essential for landlords, contractors or freelancers working cross-border or with properties across UK regions to check their specific regional higher income tax bracket and threshold.

How to check your own position

To check when you might pay 40% tax you should:

• Look at your tax code or pay-slip if you are employed and estimate total taxable income (salary + bonuses + other income).
  
• For self-employed or landlords check your self-assessment return and add together all sources of taxable income (profits, rental, dividends) to estimate whether your combined figure exceeds the higher rate tax band threshold.
  
• Use HMRC tools or an accountant’s planning model to forecast whether any incremental income (bonus, side project, new rental property) might push you over the 40 tax threshold UK.

By knowing how much you can earn before you pay 40% tax, you gain greater control of your tax planning, and by understanding the higher rate tax band you can optimise income streams and apply smart tax-efficient measures before you hit the 40 tax threshold.

READ RELATED ARTICLE: Do I Need to Register For Self Assessment?

Is the 40 tax threshold changing and what is fiscal drag’s impact?

Understanding the 40 tax threshold is essential for contractors, freelancers, landlords and SME owners because recent policy choices mean the threshold is effectively evolving. While the 40 % tax bracket rate itself remains unchanged, the threshold for the higher rate tax band has been frozen until April 2028.

Freezing the threshold means that wage inflation pushes more taxable income into the higher income tax bracket even though the threshold (for example the point where the 40% higher rate kicks in) has not moved. This effect is known as fiscal drag. 

Recent analysis shows that average wages have continued to rise, yet the higher rate tax band threshold (for England, Wales and Northern Ireland) has stayed at circa £50,270 for the tax year 2024/25. For example, commentary from Fidelity International notes that the stagnation of the threshold means many more individuals will pay higher-rate tax than originally expected.

For planning this means two key implications for your finances:

1. Income that in earlier years would have remained in the 20 % basic rate band may now spill into the 40 % rate band simply because the threshold did not keep pace with earnings.
   
2. You may need to implement higher-rate tax band mitigation strategies (such as pension contributions, timing income, or changing remuneration mix) earlier than you might previously have anticipated.
   

Our view is that proactive monitoring of both your taxable income and any changes to the threshold is critical. By doing so you avoid unexpected tax burdens creeping up when you cross the 40 tax threshold UK.

What smart planning strategies can help you stay below or mitigate the 40% tax threshold?

When the 40 tax threshold is looming for freelancers, contractors, SME owners and landlords, strategic tax planning becomes paramount. Below are tailored strategies aligned with these personas to help you manage or delay entry into the higher income tax bracket.

Maximising pension contributions to reduce taxable income

By increasing pension contributions you reduce your taxable income, therefore potentially keeping you below the 40 tax threshold. This reduces how much of your income falls into the higher rate tax band. Because pensions receive tax relief at your marginal rate, this approach is particularly valuable for higher income tax bracket planning.

Using salary sacrifice or dividend/salary mix if you are a company director

If you run your own company or act as director, adjusting the mix between salary and dividends (and using salary sacrifice schemes) can lower your taxable salary. This may help you delay crossing the threshold into the 40 % tax bracket by shifting income to more tax-efficient forms.

Timing income and expenses

Deferring a large consultation fee or bonus into the next tax year, or accelerating deductible expenses (for example for contractors or SMEs) can reduce your taxable income for the current year. When that helps you stay under the higher rate tax band, you delay the impact of the 40 tax threshold.

Using tax-efficient investment allowances (for example EIS/SEIS)

Investing in Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) qualifies for reliefs that reduce taxable income. For landlords or SME owners this can be an additional lever to reduce the slice of income that might fall into the 40 % tax band.

Splitting income with spouse or via legitimate structures

Where permissible, shifting income streams (for example rental income or dividends) to a lower-tax paying spouse or partner can keep total taxable income for you within the lower bands. This can help avoid reaching the 40 tax threshold.

Reviewing rental income and property tax planning

For landlords monitoring when they hit the 40 tax threshold UK is critical. By reviewing allowable deductions, structuring rental ownership appropriately, and forecasting next year’s rental income you reduce the risk of unexpectedly entering the higher rate tax band.

Regular forecasting of tax position mid-year

Rather than waiting until year end, you should model your taxable income mid-year, estimate when you might cross the higher rate tax band, and act accordingly. Scenario modelling, such as incremental income from a contractor engagement or rental uptick, helps plan timing or interventions before you exceed the 40 tax threshold.

Example case study

Consider a landlord whose taxable income is projected at £60,000 for the year. The 40 tax threshold (i.e., the higher rate tax band) starts at £50,270. If they make a pension contribution of £5,000, their taxable income falls to £55,000, reducing the portion taxed at 40 %. This simple adjustment lowers their exposure to the higher rate and gives them more control.

In our methodology we emphasise regular review, scenario modelling and clear communication so you stay informed about when you may cross the 40 % tax bracket, and what actions you can take ahead of that. By doing so you maintain better control and avoid surprises when your earnings move you into a higher income tax bracket.

READ RELATED ARTICLE: How to reduce tax in salary UK legally (2025 guide)

What happens if you’ve already crossed the threshold – how to minimise the hit?

If your taxable income has already pushed you into the higher rate tax band and you’ve exceeded the 40 tax threshold, remedial planning becomes essential. Once you are subject to the 40% tax rate you cannot retroactively change the band for that tax year, however you can act to reduce the overall damage. First, ensure you are claiming all available reliefs and allowable deductions. This includes maximising pension contributions, making charitable gifts eligible for tax relief, using salary sacrifice arrangements, and carrying back allowable contributions where permitted. By doing so you reduce your taxable income and thereby lessen the portion taxed at the higher rate.

Furthermore, if your adjusted net income exceeds £100,000, your personal allowance of £12,570 begins to taper away, you lose £1 of allowance for every £2 of income above £100,000, until it reaches zero at £125,140. This creates an effective marginal tax rate of about 60% for income between £100,000 and £125,140. (Institute for Fiscal Studies) 

If your income exceeds £125,140 the tax-free personal allowance is gone, and you move into the additional rate of 45% on the portion above that threshold.
In our approach we audit your income streams to identify “leakage”, for example unclaimed pension reliefs, charity gifts on Gift-Aid, overlooked allowable costs and then we restructure next year’s income flow. For example, we look at how much of your income is taxable after reliefs, and whether any large bonus, rental income or consulting fee can be adjusted timing-wise. That way you mitigate the extra tax you’ll face from crossing the 40 tax threshold UK and plan for the higher income tax bracket consequences. 

How do regional differences and multiple income streams affect the 40% tax threshold planning?

When planning around the 40 tax threshold it is crucial to consolidate all your income sources because salary, self-employment profits, rental income, dividends, savings interest and other income all feed into your total taxable income. Once combined, these income streams can push you unknowingly into the 40% tax bracket or the higher income tax bracket threshold. The fact that you have multiple income streams, say you are a freelancer with contracting income, you own rental property and you receive dividends, adds complexity to when you pay 40 tax and how the higher rate tax band is triggered.

Additionally, regional differences matter. For taxpayers resident in Scotland the tax bands and thresholds differ from England, Wales and Northern Ireland. For example, the higher rate in Scotland begins at a lower taxable income level and the top rate for non-savings income is higher. (GOV.UK) Because of that regional nuance you must model your combined income streams according to your residence region.

In practice our methodology is to aggregate all income types in mid-year forecasting, identify the “trigger income” that may tip you into the 40% tax bracket (or beyond), and prepare a holistic model. For contractors with PAYE and umbrella arrangements, freelancers with mixed self-employment and rental, and landlords with property plus consulting income the key is viewing your finances through the lens of the 40 tax threshold UK and the higher rate tax band. By doing so you can flag early when you will cross the threshold, optimise the structure of your income and take remedial steps to control exposure to the higher income tax bracket.

Conclusion

Understanding the 40 tax threshold is essential for effective income planning. Whether you earn a salary, rental income, or dividends, knowing how much you can earn before you pay 40% tax allows you to make informed financial decisions. Early forecasting, accurate income tracking, and smart use of pension or charitable reliefs can help you manage exposure to the higher rate tax band.

As a digital-first, client-centric firm working with freelancers, contractors, SMEs, and landlords, ARB Accountants helps clients bring clarity to complex thresholds and stay in control of their tax position.

To stay ahead, schedule a tax review with our team, use our income modelling tool, and begin mid-year forecasting to ensure you make the most of every allowance within the 40 tax threshold UK.

Frequently Asked Questions