Has the 40% Income Tax Threshold Been Reduced? The Truth Behind the Confusion
One of the most common questions people have been asking recently is:
“Has the higher 40% income tax rate been secretly reduced to £37,701?”
The short answer is no, it has not changed—but confusion arises due to the way tax bands are displayed. If you’re unsure about how income tax works, you’re not alone. The UK tax system can sometimes seem complicated, especially with recent economic changes and freezes on tax thresholds.
This article will break down how income tax is calculated, clarify why the 40% tax threshold hasn’t changed, and explain how to optimize your tax position legally.
How Income Tax Works in the UK
In the UK, income tax is charged on most earnings, including salaries, pensions, rental income, and self-employment profits. However, you don’t pay tax on all of your income—there are different bands and allowances.
Income Tax Bands for 2024/25
| Tax Band | Taxable Income (£) | Tax Rate (%) |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% (Tax-Free) |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
Most people in the UK receive a Personal Allowance of £12,570, which means they can earn up to this amount tax-free. After that, earnings fall into different tax bands.
Where Did the £37,701 Figure Come From?
Many people have mistakenly believed that the higher rate of tax (40%) now starts at £37,701.
This misunderstanding comes from the way tax bands are displayed. Let’s break it down:
You receive a Personal Allowance of £12,570, which is tax-free.
The next £37,701 (£50,270 – £12,570) is taxed at 20% (Basic Rate).
Earnings above £50,270 are taxed at 40% (Higher Rate).
This has always been the case, and nothing has changed. People get confused because they see “£37,701” and assume that’s the new threshold for higher-rate tax—but in reality, it’s just the amount of taxable income subject to 20% before hitting the 40% rate.
Example Calculation
Let’s say your total annual income is £60,000. How much tax would you pay?
Personal Allowance: First £12,570 is tax-free.
Basic Rate (20%): Next £37,701 is taxed at 20% = £7,540.
Higher Rate (40%): Remaining £9,730 is taxed at 40% = £3,892.
Total Income Tax Paid = £7,540 + £3,892 = £11,432.
Key takeaway: The 40% tax rate still starts at £50,271, as it has for several years.
Frozen Tax Thresholds: Why It Feels Like More Tax is Being Paid
Although the higher rate threshold hasn’t changed, the UK government has frozen tax bands until 2028. This is known as fiscal drag—as wages increase due to inflation, more people are pulled into higher tax brackets, even if their real spending power hasn’t improved.
How Fiscal Drag Affects You
- More people are now paying 40% tax, even if their standard of living hasn’t improved.
- More people are paying income tax in general, as wage increases push lower earners above the Personal Allowance.
- Higher earners see a greater tax burden, as the additional rate threshold remains at £125,140.
This means that while the 40% tax band hasn’t changed, more people are finding themselves in it—which feels like a stealth tax rise.
How to Minimize Your Tax Liability Legally
Nobody wants to pay more tax than necessary. Here are some legitimate tax planning strategies to reduce your tax burden while staying fully compliant with HMRC rules.
1. Maximize Your Pension Contributions
Contributions to a workplace pension or private pension receive tax relief at your highest rate.
Basic Rate Taxpayer: Contribute £80, and the government adds £20.
Higher Rate Taxpayer: You can claim additional tax relief via self-assessment.
If your income is just over £50,270, increasing your pension contributions could keep you in the 20% tax bracket and reduce how much you pay at 40%.
2. Use Salary Sacrifice Schemes
Some employers offer salary sacrifice schemes that reduce taxable income. Popular options include:
Cycle-to-Work Scheme 🚴
Electric Car Lease Schemes 🚗
Private Healthcare or Gym Memberships 🏥
Since contributions are deducted before tax, they lower your taxable income, helping you avoid higher-rate tax.
3. Transfer Income to a Lower-Earning Spouse
If you’re married or in a civil partnership, income-splitting strategies can reduce tax liability.
Marriage Allowance: If one spouse earns less than £12,570, they can transfer £1,260 of their allowance to the higher earner.
Joint Ownership of Assets: Transferring rental property or dividends to a lower-tax spouse can reduce tax on investment income.
4. Claim All Allowances and Reliefs
Check for additional tax reliefs and allowances you may be eligible for:
Work-from-Home Tax Relief – If you work remotely, you can claim up to £6 per week tax-free.
Dividend Allowance – £500 tax-free for dividend income.
Capital Gains Tax Allowance – £3,000 exemption in 2024/25.
5. Plan for Self-Employment or Side Hustles
If you run a side business or work as self-employed, you can deduct business expenses before paying tax.
Home Office Expenses
Business Travel & Equipment
Subscriptions & Training
Good tax planning can keep more of your income in your pocket.
Final Thoughts: What You Should Do Next
Key Takeaways
- The 40% tax threshold is still £50,271—it has NOT been reduced.
- The confusion arises from tax bands being displayed differently.
- More people are now paying higher-rate tax due to frozen thresholds.
- There are legitimate ways to reduce your tax burden—through pensions, allowances, salary sacrifice, and careful planning.
Don’t leave your tax planning until it’s too late!
Get Expert Tax Advice with Merranti Accounting
At Merranti Accounting, we specialize in helping individuals and businesses navigate the UK tax system efficiently. Whether you’re a higher-rate taxpayer, a small business owner, or someone looking for tax-saving opportunities, our expert accountants can help you maximize your savings.
Start tax planning today with Merranti Accounting!
