Originally posted on: 23 September 2024
Updated on: 27 November 2025
In today’s blog, I want to take a look at the higher rate tax bracket and how it works for income earners and also for capital gains tax purposes. It’s a fairly niche subject this week, but for many of our clients, the transition from being a basic rate taxpayer to a higher rate taxpayer does have significant tax implications.
The most common forms of income our clients have that fall within the higher rate band are salary, dividends, and capital gains (well, capital gains is not “income” but its certainly taxable). Often other types of income (such as rental property income) will push dividends into the higher rate tax band, so its useful to get a handle on this tax band, and how it works in practice.
According to HMRC statistics, around 16% of income tax payers fall within the higher rate tax band. The interesting thing for me is that this represents a 40% increase compared to three years ago, making the transition from basic rate to higher rate taxpayer an increasingly important threshold to understand.
A higher tax bracket results in paying higher income tax rates on earnings above certain levels. This article explains the UK’s higher tax bracket thresholds, how much tax you’ll pay, and ways to reduce your tax bill.
Key Takeaways
- The higher tax bracket in the UK means individuals with incomes above £50,270 pay 40% on earnings exceeding this threshold. Immediately below this threshold, this tax rate is 20%.
- The higher tax bracket on dividends paid above £50,270 (when considering total earnings) is 33.75%. Immediately below this threshold, this tax rate is a much smaller 8.75%.
- The personal allowance is £12,570, but it gradually reduces for earners over £100,000, impacting the taxable income for higher rate taxpayers. This can present a very ugly tax situation for taxpayers with earnings between £100,000 and £125,140.
- Effective tax management strategies include salary sacrifice (the cycle to work scheme is also great), pension contributions, and utilising tax-free allowances like ISAs and personal savings to minimise tax liabilities.
What is the Higher Tax Bracket?
At its core, a higher tax bracket refers to the elevated rate of income tax applied to earnings surpassing a specific threshold. This system is designed to ensure that higher earners contribute a larger share of their income to taxes. For instance, individuals with an annual income of £60,000 fall within this higher tax bracket.
The UK tax system calculates taxes on your taxable income after deducting the personal allowance, which for the 2024/25 tax year stands at £12,570. This means that only the income exceeding this allowance, and exceeding the basic rate threshold, is subject to higher tax rates.
The UK operates a progressive tax system that will be familiar to large numbers of taxpayers around the world, where the more you earn, the higher the rate of tax you pay (ignoring of course any convoluted tax planning structures).
Income Thresholds for 2024/25
For the 2024/25 tax year, the income tax thresholds are clearly defined. Individuals earning between £50,271 and £125,140 will fall into the higher rate tax band and will be taxed at 40% on this income. This band represents the marginal tax rate applicable to those earnings. Dividend income in this band is taxed at 33.75%, and the capital gains tax rate is 20% (24% on gains from residential property).
In Scotland, a higher rate tax band is 42% and applies to income exceeding £43,662 from April 2024. Dividend tax rates and capital gains tax rates are the same as for the rest of the UK.
How Much Income Tax Do You Pay in the Higher Tax Bracket?
Knowing the amount of income tax owed in the higher tax bracket is vital for effective financial planning. In the UK, the higher rate of income tax is 40%. This rate applies to higher income earners. This rate applies to the portion of your taxable income that exceeds the higher rate threshold of £50,270.
For example, if your annual income is £60,000, you will be taxed at the higher rate on the income above £50,270, which is £9,730. The 40% rate is often referred to as a marginal tax rate, meaning it is only applied to the income that exceeds the threshold.
This tiered system ensures that higher earners contribute progressively more as their income increases, reflecting the principle of fairness in the tax system. Understanding these brackets enables you to anticipate your tax liabilities accurately and plan accordingly.
“…the service has been fabulous.”
Ah Mike, we think you’re pretty fabulous too!
Personal Allowance Impact on Higher Rate Taxpayers
The personal allowance significantly impacts higher rate taxpayers. In the 2024/25 tax year, the tax free personal allowance is £12,570, the income you can earn before paying income tax. Yet, this allowance diminishes gradually for those earning over £100,000.
This is an extremely important point to grasp and is a well-known weakness in tax fairity (a term I just made-up to describe the process of fairly attributing tax across the income earning spectrum).
The reduction works on a sliding scale, where the personal allowance decreases by £1 for every £2 earned above £100,000. This means that by the time your income reaches £125,140, your income limit is completely eliminated, resulting in higher taxable income.
This reduction significantly affects higher rate taxpayers by increasing the income subject to the 40% tax rate. Grasping how your income level impacts your personal allowance is crucial for accurate tax planning. In the practice what this means is any income that you earn between £100,000 and £125,140 is taxed at 60% which reflects the loss of your personal allowance.
Strategies to Reduce Your Higher Rate Income Tax Bill
To reduce your higher rate income tax bill, consider strategies and tax relief options. Participating in salary sacrifice schemes can lower your taxable income and overall tax liability.
Additionally, investing in an ISA allows you to save up to £20,000 tax-free within a tax year. Higher rate taxpayers can also earn up to £1,000 in interest tax-free under the personal savings allowance, depending on their total income.
Investing in an ISA is a particularly useful way of keeping your tax band in check, because any income you earn from your ISA is keep out of the usual tax band calculation. This means if you earn £50,000 in PAYE salary, and also receive an income of £10,000 in dividends from your ISA, you only pay tax at the basic rate on your salary and pay no tax on your dividend income. The ISA is effectively a tax shield that prevents you paying any form of tax on the income (or gains) you receive from your ISA investments.
Implementing these strategies can significantly reduce the amount of income subject to higher tax rates and help you retain more of your earnings.
Claim Tax Relief on Pension Contributions
Claiming tax relief on pension contributions is highly beneficial for higher rate taxpayers. Contributing to a pension grants total tax relief of 40%, encompassing both basic and additional relief, significantly impacting your overall tax bill.
The method of pension contribution, such as net pay or relief at source, influences the tax relief amount. Additionally, salary sacrifice can further reduce taxable income and overall tax liability.
These strategies not only lower your current tax bill but also contribute to your future financial stability. Of course, this does now wrap your funds up in a Pension, but if you don’t need the money for the time being, its a useful of way (a) investing it wisely, and (b) saving tax while doing so.
National Insurance Contributions for Higher Earners
National Insurance contributions are another critical aspect for higher earners, except here the NIC rate for higher earner actually drops! In the 2024/25 tax year, the primary threshold for National Insurance contributions is £242 per week or £12,570 annually. Once your earnings exceed this threshold, you must start paying National Insurance on your earnings (salary/wages) at 8%.
The upper earnings limit for National Insurance contributions is set at £967 per week, which coincides with an annual rate of £50,270. Employees contribute 8% on earnings between the primary threshold and the upper earnings limit. For higher rate earners, the NIC rate drops to 2%.
Dividend Income and Higher Rate Tax
Dividend income is another area where higher rate taxpayers need to be wary. For the 2024/25 tax year, higher earners can receive up to £500 in dividends tax-free under the dividend allowance. This allowance helps reduce the amount of dividend income subject to tax.
However, any dividend income above this allowance is taxed at a rate of 33.75% for higher rate taxpayers. Calculating taxable dividends after deducting the tax-free allowance from your total dividend income is important. Awareness of these rates and allowances aids in effective investment planning and minimising tax liabilities.
Capital Gains Tax Rates for Higher Rate Taxpayers
Capital gains tax is another important consideration for higher rate taxpayers. For the 2024/25 tax year, capital gains tax rates for higher rate taxpayers are set at 20% or 24%, depending on the type of asset sold. Gains from most chargeable assets are taxed at 20%, whereas gains from residential property face a rate of 24%.
The annual exempt amount for capital gains tax is set at £3,000. Any gains exceeding this amount are subject to capital gains tax. When your total income exceeds £50,270 the portion of gains above this threshold is taxed at the higher rate. Knowing these rates and exemptions is vital for effective financial planning and reducing tax liabilities.
“…the service has been fabulous.”
Ah Mike, we think you’re pretty fabulous too!
Summary
In summary, understanding the higher tax bracket is really useful for effective financial planning and minimising your tax liabilities. By being aware of the income thresholds, tax rates, and personal allowances, you can make informed decisions about your finances, and ensures your tax liability does not catch you by surprise. Additionally, leveraging tax relief options and savings allowances can significantly reduce your overall tax bill.
Whether it’s through pension contributions, personal savings allowances, or strategic investments, there are numerous ways to manage your tax liabilities effectively. By planning ahead and utilising available resources, you can ensure that you retain more of your hard-earned money.
Frequently Asked Questions
What is the higher tax bracket for the 2024/25 tax year?
For the 2024/25 tax year, individuals earning between £50,271 and £125,140 are subject to the higher rate tax band, which is taxed at 40%. Any dividends within this threshold are taxed at 33.75%.
How can I reduce my higher rate income tax bill?
In this article we look at a few different options to reduce your income tax bill. Things such as salary sacrifice arrangements and pension contributions can certainly. Another really useful tax planning tool is contributing funds into an ISA. Your ISA is effectively a tax shield, which prevents you from paying any tax on all income and gains that you receive from your ISA investments.
What is the personal allowance for higher rate taxpayers in 2024/25?
The personal allowance for higher rate taxpayers in 2024/25 is £12,570, which decreases for incomes exceeding £100,000 and is fully withdrawn at £125,140. This gradual lowering of your personal allowance produces the effect of having your income within this narrow band taxed at 60%.
How are dividend incomes taxed for higher rate taxpayers?
Higher rate taxpayers are allowed a tax-free dividend income of up to £500; however, any dividends exceeding this allowance are taxed at a rate of 33.75%. This is a large jump up from the 8.75% that basic rate taxpayers pay on their dividend income.
What are the capital gains tax rates for higher rate taxpayers?
For higher rate taxpayers in the 2024/25 tax year, the capital gains tax rate is 20% on most chargeable assets and 24% on gains from residential properties.