Myth busting – paying Higher Rate tax
Have you ever wondered how higher rate tax works?
Many people know that higher earners can pay higher rates of tax. This can make some people nervous about earning ‘too much’ and paying tax at the higher rate of 40% in England, Wales and Northern Ireland. (See below for the higher rates which apply to Scottish taxpayers.)
We recently ran polls on TikTok and LinkedIn to ask people whether they think that a higher rate taxpayer pays 40% tax on all of their income.
Our results showed that a significant proportion of people we surveyed – 86% - know that, thanks to a system of thresholds, higher rate tax only applies to earnings above the higher rate threshold. However, previous polling (with a larger sample size) shows that this is an area which is commonly misunderstood.
What is a higher rate taxpayer?
A higher-rate taxpayer is someone who pays income tax on some of their income at a rate of 40% - that’s 40p in the pound. This is in contrast to a basic-rate taxpayer who pays income tax at a rate of 20%. (These are the rates which apply to income including wages, salary and pensions and currently savings and property income. There are separate tax rates for dividend income, and there will be separate rates for savings and property income from April 2027. But regardless of rates, the principles remain the same.)
Our income tax system is intended to be progressive, so that as people earn more they start to contribute more in tax. But becoming a higher-rate taxpayer doesn’t mean paying 40% tax on all of your income. Thanks to a system of tax-bands, the 40% rate of tax is only charged on income above the higher-rate threshold.
The higher rate threshold is currently £50,270. It has been at this level since April 2021 and we expect it to stay the same until at least April 2031.
How it works in practice.
Let’s take Michaela as an example. She earns £55,000 a year. This is over the higher-rate threshold and means she can call herself a ‘higher rate taxpayer’. If she gets a pay-rise of £1,000 she’ll pay income tax at 40% on that extra £1,000 of income.
However, she is not paying 40% tax on all of her income; just the amount over the higher rate threshold.
The first £12,570 of her income is tax-free - that’s her personal allowance. Most people are entitled to a personal allowance, which allows you to earn a certain amount of income before paying income tax. (Complications arise for very high earners, who earn over £125,140 year but we won’t cover that here.)
The next £37,700 of her income is taxable at 20% - this is all income which falls into the basic rate band.
So far we have accounted for the first £50,270 of income - £12,570 falling in the tax-free personal allowance, and £37,700 which is taxable at 20% in the basic rate band. With a salary of £55,000 that leaves another £4,730 of income to be taxed - this part is taxed at 40%.
Effectively Michaela’s income is cut into bands or slices. The first slice is taxed at 0%, the next at 20% and the rest of her income at 40%.
Very high earners, with an income of over £125,140, will also pay the additional rate tax of 45%.
On top of this, Michaela will also pay National Insurance Contributions (NICs). NICs have a separate set of rates and bands, which work in a similar way.
Thankfully, for employed people, income tax and NIC is deducted automatically from their wages or salary by their employer.
What about Scottish taxpayers?
If you are a Scottish taxpayer then the position is more complex. Scotland has six tax-bands instead of three like the rest of the UK. The Scottish higher rate is 42% and it applies once an individual starts to earn over £43,663.
Although Scottish rates are much more complex, the same principles apply as elsewhere in the UK with income taxed depending on how it falls into the different tax bands.
Summary
As your income increases, you might start to pay higher rates of tax, but only on the amount of any income which falls into the next tax band. Rest assured that becoming a higher rate taxpayer does not mean paying 40% tax on all of your income.
We also have a YouTube explainer covering this point- Paying Higher Rate Tax.
To explore all the resources, daily content, and ways to get involved during Tax Awareness Week 2026, visit the Tax Awareness Week webpage - and watch out for new content being added every day throughout the week!
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.