Additional Rate Tax Explained: Thresholds, Rates & Examples

Additional rate tax is the highest band of Income Tax in the UK, and it applies to taxable income above £125,140 for the 2026/27 tax year. At this level, you pay 45% tax and lose your Personal Allowance entirely. 

If you're a business owner, company director, landlord, or high earner, understanding the additional rate can help you plan your income more tax-efficiently. 

This guide covers how the additional rate tax works in 2026/27, what income it applies to, and what you can do to keep your tax bill as low as possible.

Key points

• Additional rate tax starts above £125,140 💷
  Income above £125,140 is taxed at 45%, although many taxpayers face an effective 60% marginal tax rate between £100,000 and £125,140 due to the Personal Allowance taper.
• Pension contributions can significantly reduce tax 💰
  Paying into a pension can lower your adjusted net income, restore your Personal Allowance, and decrease the amount of income taxed at higher rates.
• All taxable income counts toward the threshold 📊
  Salary, self employment profits, rental income, dividends, pension income, and taxable savings interest are all considered when determining your tax band.
• Tax planning opportunities exist for higher earners 💡
  Strategies such as Gift Aid donations, Individual Savings Account investing, and careful income timing can help reduce your overall tax liability.
• ANNA helps you stay on top of your tax obligations 🚀
  ANNA automatically tracks income, estimates tax bills in real time, files Self Assessment returns, and helps you set aside money for future tax bills, making additional rate tax easier to manage.

Income Tax rates and thresholds for 2026/27

The UK uses a banded Income Tax system, which means different portions of your income are taxed at different rates as your earnings rise. 

You don't pay the higher rate on everything once you cross a threshold. Only the income that falls within each band is taxed at that band's rate.

Here’s a quick look at the numbers:

The personal allowance and basic rate limit are both frozen until April 2028.

🧠 Good to know

These bands apply to England, Wales, and Northern Ireland. Scotland sets its own Income Tax rates through the Scottish Parliament, so Scottish taxpayers follow a different structure with more bands and different thresholds. 

How the personal allowance taper works

The most important fact to understand about income above £100,000 is that your personal allowance starts to be withdrawn before the additional rate even applies. This creates a band of income that is, in practice, taxed more heavily than income in the additional rate band itself.

HMRC reduces your £12,570 personal allowance by £1 for every £2 of income above £100,000. 

That means:

• At £100,000, your full £12,570 allowance applies
• At £112,570, your allowance is halved to £6,285
• At £125,140, your allowance is reduced to £0

As your allowance is being reduced, you're paying 40% tax on income that would otherwise have been tax-free, on top of the 40% higher rate tax on the same slice of income. 

That's where the 60% effective marginal rate comes from. It’s also why many high earners find the £100,000 to £125,140 band more costly than the additional rate band above it.

Once your income exceeds £125,140, the additional rate of 45% applies to everything above that point, with no personal allowance remaining.

💡 Did you know? 

If your income regularly sits between £100,000 and £125,140, a pension contribution that reduces your adjusted net income below £100,000 can restore your full personal allowance. It effectively nets you 60p in tax relief for every £1 contributed. 

ANNA's money pots can set money aside automatically so the funds are there when you need them.

Additional rate tax example

If you earn £160,000 through salary in the 2026/27 tax year, part of your income falls into the additional rate band and is taxed at 45%. 

Because your income exceeds £125,140, you also lose your Personal Allowance, meaning more of your income becomes taxable.

In this scenario, your Income Tax bill would be around £55,689 before taking National Insurance into account.

However, pension contributions can reduce your adjusted net income. If you bring it below £125,140, you can fully restore your Personal Allowance and avoid the additional rate altogether. 

What income counts toward the additional rate threshold?

The £125,140 threshold is measured against your adjusted net income, which adds up all your taxable income sources and then subtracts certain reliefs. 

Taxable income includes:

• Employment income (salary, bonuses, benefits in kind)
• Self employment profits
• Rental income (after allowable expenses)
• Savings interest above your Personal Savings Allowance
• Pension income (State Pension and private pensions)
• Dividends (taxed at different rates but included in the threshold calculation)

From that total, HMRC deducts reliefs such as pension contributions and Gift Aid donations to arrive at your adjusted net income. 

Dividend tax and the additional rate

Dividends are taxed separately from other income, at their own rates. They sit within the same Income Tax bands as employment or self-employment income, but are charged at lower rates. This reflects the fact that dividends are paid from profits that have already been subject to Corporation Tax.

The Dividend Allowance for 2026/27 is £500. Any dividend income above that allowance is taxable, and dividends falling into the additional rate band are charged at 39.35%.

If your salary or other income already exceeds £125,140, most or all of your dividends will fall into the additional rate band and be taxed at 39.35%. 

For director shareholders who draw both salary and dividends, this stacking effect makes the overall income mix worth reviewing each year.

National Insurance

Income Tax and National Insurance are calculated separately, but both affect your total tax position. 

For employees, Class 1 NICs work as follows in 2026/27:

Additional rate taxpayers are well above the £50,270 upper earnings limit, so they pay 2% employee NICs on all earnings above that threshold. There's no further NIC rate change at £125,140.

If you're self employed, you pay Class 4 NICs instead. The rates for 2026/27 are 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. 

Dividends don't attract National Insurance, which is one reason the salary-and-dividend combination is common among owner-managed limited companies.

How to reduce your additional rate tax bill 

If your income exceeds £125,140, there are several legitimate ways to lower your taxable income. 

Here are some strategies you can try:

Make pension contributions 

Pension contributions are usually the most effective option. Contributions to a registered pension scheme reduce your adjusted net income, which can bring income back into a lower tax band or restore part of your personal allowance. 

Higher and additional rate taxpayers claim the extra relief above the basic rate through their Self Assessment return. The annual allowance for pension contributions is £60,000 in 2026/27, though this may be tapered for those with adjusted income above £260,000. 

Donate through Gift Aid 

When you donate to a qualifying charity, the basic rate band is extended by the gross value of your donation. This means less of your income falls into the higher and additional rate bands.

Any additional tax relief can be claimed through your Self Assessment return.

Use your Individual Savings Account allowance

Individual Savings Accounts (ISAs) don't reduce your tax bill in the current year. Still, income and gains from ISA investments don't count as taxable income going forward. 

If savings interest or investment income is contributing to your total, using your £20,000 annual ISA allowance removes that income from future threshold calculations.

Consider the timing of your income 

Talk to an accountant about when you take income, particularly if you’re a company director who can choose when to pay dividends or bonuses. 

For example, you might be able to defer a dividend payment to the following tax year to avoid pushing your total income into the additional rate band. 

How Self Assessment works for additional rate taxpayers 

You’ll usually need to complete a Self Assessment tax return if you receive dividends, rental income, or self employment income, or if you claim tax relief on pension contributions and Gift Aid donations. 

Your Self Assessment return is where you declare all income, claim reliefs, and settle any tax owed. The deadline for online filing is 31 January after the end of each tax year, with payment due on the same date.

If you owe more than £1,000 and less than 80% of your tax was collected through PAYE, HMRC will require payments on account toward the following year's bill, due in two instalments in January and July. 

For additional rate taxpayers, these amounts can be substantial, so setting funds aside throughout the year can make a difference.

💡 Did you know? 

ANNA's Auto Accountant tracks your income throughout the year, estimates your tax position in real time, and files your Self Assessment directly with HMRC for free. 

Managing additional rate tax with ANNA 

Once you are close to the additional rate threshold, keeping track of your income, tax bills, and filing deadlines becomes more important than ever. A surprise tax bill can quickly run into thousands of pounds, especially if you receive income from multiple sources. 

ANNA helps you stay organised throughout the year by automatically categorising transactions, tracking your income, and estimating your tax position in real time. You can see how much tax you may owe as your earnings increase, and thus avoid surprises when your return is due.

Here’s what you get with ANNA:

• Money pots: Automatically set aside money for Corporation Tax, VAT, and Self Assessment
• Real-time tax estimates: Track your expected tax bill throughout the year
• Self Assessment filing: Submit your tax return directly to HMRC, for free
• Automated bookkeeping: Categorise transactions and keep records up to date automatically
• Expense management: Track business spending and store receipts digitally
• Invoicing tools: Create invoices, accept payments, and monitor cash flow
• Business account: Manage your business finances and accounting in a single app

Try ANNA today and manage your additional rate tax with ease.