40% and 45% Income Tax Rates: When Do They Apply?
Individuals with income approaching or exceeding £100,000, business owners extracting income through salary or dividends, and employees receiving bonuses that increase adjusted net income. When the higher rates of Income Tax apply, how the personal allowance taper operates between £100,000 and £125,140, and why this can create an effective 60% marginal tax rate. Once adjusted net income exceeds £100,000, the personal allowance of £12,570 is reduced by £1 for every £2 of additional income. At £125,140, the personal allowance is fully withdrawn. This can significantly increase the effective tax rate on income within this band.The Personal Allowance Threshold
The standard personal allowance is £12,570. Where adjusted net income exceeds £100,000, the personal allowance is reduced. For every £2 of income above £100,000, £1 of personal allowance is withdrawn. At £125,140, the personal allowance is fully withdrawn.How the 60% Marginal Rate Arises
Between £100,000 and £125,140, income is effectively taxed at a higher marginal rate. This occurs because:- Income is taxed at the higher rate, and
- The personal allowance is gradually withdrawn.
Adjusted Net Income
The taper applies based on adjusted net income. This includes taxable income such as:- Salary
- Bonuses
- Dividends
- Other taxable income sources
Real-World Application
- An employee receiving a bonus that increases income above £100,000 may enter the taper band.
- A business owner extracting additional dividends may increase adjusted net income beyond £100,000.
- An individual with income between £100,000 and £125,140 may face an effective 60% marginal rate.
UK-Wide Application
The personal allowance taper applies across the UK. While income tax bands may differ in certain parts of the UK, the withdrawal of the personal allowance between £100,000 and £125,140 operates on the same basis.Planning Considerations
You should consider what financial planning opportunities are available if your adjusted net income is approaching or exceeds £100,000.- Review expected income before the end of the tax year.
- Assess the impact of bonuses or dividends on adjusted net income.
- Consider whether action is required before 5 April.
Approaching the Higher-Rate Threshold? Review Your Position
Higher and additional rate Income Tax thresholds can be triggered more easily than many taxpayers realise, particularly where dividends, bonuses, rental income, or benefit withdrawals are involved. Frozen bands mean income growth can quietly push you into a higher bracket, increasing overall liability. Seeking timely tax planning services London helps you assess when higher rates apply and structure income more efficiently. Cigma Accounting, advising clients from our Hammersmith and supporting individuals in Kensington High Street and Turnham Green, provides clear analysis tailored to your income profile.
Crossing higher-rate thresholds can also reduce entitlement to certain allowances and increase effective marginal rates. Working with an experienced tax accountant in London allows you to plan remuneration, pension contributions, and dividend timing before year-end. Cigma Accounting offers practical, forward-looking support with physical offices across London, helping you manage exposure confidently while maintaining full compliance.
UNCERTAIN WHEN YOU MOVE INTO HIGHER TAX BANDS?
Crossing into higher or additional rate tax can affect salary, dividends, rental income, and pension contributions. Understanding when these thresholds apply helps you plan withdrawals and income timing more efficiently.
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