£40000 After Tax in 2023

In this guide, we explain the tax rules for both employed and self-employed workers, together with calculations to illustrate your personal tax liability for Income Tax and National Insurance Contributions (NICs) on an income of £40,000.

We also cover the relevant rates and thresholds for the tax year 2023/24.

Income tax rates and bands 2023

The amount of Income Tax that you are liable to pay each year will depend on how much of your income exceeds your personal tax allowance and how much falls within each tax band. Some earnings are entirely tax-free, although anything above the personal tax-free allowance of £12,570 may be subject to tax at different rates. This is because you will not pay tax at the same rate on all income, where the more you earn, the higher the rate.

Income Tax on earnings from both paid employment or self-employment is charged at three different rates: the basic rate, the higher rate and the additional rate. For 2023/2024, these three rates have been set at 20%, 40% and 45% respectively.

For 2023-2024, the standard personal allowance of £12,570. Your allowance may be bigger depending on your circumstances; if you claim, for example, marriage allowance.

You may also have an additional tax-free allowance on the first £1,000 of income from self-employment, known as your trading allowance, which can be used instead of deducting expenses.

The only change in the context of Income Tax for the year 2023/24 is a reduction in the additional rate band. This essentially means that anyone classed as a high earner will be paying tax at the 45% additional rate on more earnings than in previous years.

Tax bands for 2023/2024

For the financial year 2023/24, for any income in excess of the personal allowance of £12,570, the three different rates and bands are as follows:

• £0 to £37,700: 20% basic rate Income Tax band
• £37,701 to £125,140: 40% higher rate Income Tax band
• Over £125,140: 45% additional rate Income Tax band.

The rates and bands, including the personal tax allowance, are therefore as follows:

• £0 to £12,570: 0% personal tax allowance band
• £12,571 to £50,270: 20% basic rate Income Tax band
• £50,271 to £125,140: 40% higher rate Income Tax band
• Over £125,140: 45% additional rate Income Tax band.

For 2023/24, the Income Tax rates and bands for Wales have been brought in line with those for England and Northern Ireland. However, different rates and bands continue to apply for Scotland, although the threshold for the top rate of tax will be reduced to £125,140, in line with the additional-rate tax band in place elsewhere in the UK.

£40,000 after tax for financial year 2023/24

If you earn £40k during the financial year 2023/24, your income tax liability will be made up of:

• Up to £12,570: no Income Tax payable on the first £12,570 of your earnings
• Between £12,571 and £50,270: 20% Income Tax payable on the remaining £27,430
• Total income tax on £40,000 is £5,486 (ie £27,430 x 20%).

After income tax deduction, a £40,000 salary will leave £34,514 before National Insurance.

Tax bands for 2022/23 financial year

For the financial year 2022/23, for any income in excess of the personal allowance of £12,570, the three different rates and bands are as follows:

• £0 to £37,700: 20% basic rate Income Tax band
• £37,701 to £150,000: 40% higher rate Income Tax band
• Over £150,000: 45% additional rate Income Tax band.

The rates and bands, including the personal tax allowance, are therefore as follows:

• £0 to £12,570: 0% personal tax allowance band
• £12,571 to £50,270: 20% basic rate Income Tax band
• £50,271 to £150,000: 40% higher rate Income Tax band
• Over £150,000: 45% additional rate Income Tax band.

Importantly, these are the applicable rates for England and Northern Ireland, where different rates apply for Wales and Scotland.

£40,000 after tax for financial year 2022/23

This means that if you earned £40k for the tax year 2022/23, applying the rates and bands with the standard personal tax allowance, the Income Tax you must pay is calculated as follows:

• Up to £12,570: no Income Tax payable on the first £12,570 of your earnings
• Between £12,571 and £50,270: 20% Income Tax payable on the remaining £27,430
• Total income tax on £40,000 is £5,486 (ie £27,430 x 20%). 

After income tax deduction, a £40,000 salary will leave £34,514 before National Insurance.

 

National Insurance rates and thresholds

National Insurance is payable by both employed and self-employed workers over the age of 16. This is a contribution you must make to be eligible for certain benefits and the state pension. If you work within an employed role, you will pay Class 1 National Insurance. Your employer will also pay a separate tax to HMRC for employing you, although is an additional cost to your employer on top of your salary of £40,000.

Employee contributions are referred to as primary Class 1 NICs and are paid directly out of the employee’s wages via PAYE, while the employer’s contributions are referred to as secondary contributions and are paid by the employer. If you work for yourself you will pay Class 2 and Class 4 NICs, where Class 2 is a flat weekly rate, while Class 4 is a percentage of the profits you earn, where both are paid at the same time as your Income Tax as part of your self-assessment.

There were a lot of changes to the National Insurance rates and thresholds during 2022/23. On 6 April 2022, as part of the government’s plan to pay for health and social care after the pandemic, the NI rate went up by 1.25 percentage points. On 6 July 2022, the contribution threshold for employees was then raised from £9,880 to £12,570, so that employees would be required to pay NICs on less of their earnings, with the health and social care levy being abolished from 6 November 2022.

The net effect of these changes meant that the rate on employee pay between £12,570 and £50,270 dropped from 13.25% back down to 12%. The figure of £50,270 represents the upper earnings limit for Class 1 NICs, where any balance of employee earnings above this threshold has been be payable at 2%, so this does not impact anyone with a salary of £40k.

With no further changes expected for 2023/24, if you are an employee earning above £12,570 a year, this means that you will pay NICs at a rate of 12% for the upcoming year.

In the context of self-employed workers, if you earned over the small profits threshold for Class 2 NICs of £6,725, you will liable to pay a fixed rate of £3.45 for each week of self-employment.

For Class 4 NICs, if you earned over the lower profit limit of £12,570 you will be liable to pay contributions at a rate of 9%. This rate applies to earnings between £12,570 and £50,270.

On earnings over the upper profits limit of £50,270, the Class 4 NIC rate is reduced from 9% to 2% for 2023-2024 although, as with employed earnings in excess of this threshold, this would not impact you if you made a profit of £40K.

If you are an employee, you can check if you are paying or have paid the right amount of Income Tax and National Insurance Contributions online at GOV.UK for any given tax year.

You will need to enter your estimated weekly or monthly profit to get an idea of how much tax and Class 2/4 NICs you will be required to pay. However, this tool assumes that you receive the standard personal allowance and have no other taxable income. It also does not include any payments on account that you may have made for previous tax bills.

Unless your earnings from self-employment are straightforward, it is always best to seek the advice and assistance of an accountant specialising in sole traders accounts. In this way, you can be sure that you will be paying the correct amount of both tax and National Insurance, while maximising the available allowances to help minimise your bill.

How is Income Tax and National Insurance paid?

If you are employed, Income Tax and National Insurance Contributions are collected at source, deducted from your wages by your employer to be paid directly to HMRC. If you are self-employed, Income Tax is paid at the same rate as those in employment, although these are paid a year in arrears through HMRC self-assessment. The National Insurance Contributions payable by the employed or self-employed are calculated slightly differently.

If you are a filing a self-assessment return for the first time, you must register as self-employed with HMRC by 5 October in the second tax year that your business has been running. As the government is rolling out a new scheme to move the tax system fully online, it is best to register for self-assessment online, although you can still register by post. Once you have registered for self-assessment you will be sent a 10-digit Unique Taxpayer Reference (UTR) number and a code to activate your online account.

You must file an online self-assessment return for the purposes of both Income Tax and National Insurance by 31 January of the year following the tax year to which it applies. For 2022/2023, your tax return must be filed by 31 January 2024. For postal returns you will need to submit your form by 31 October 2023. For those of you who also have an employed job role, you may be able to pay any tax due on your self-employed earnings through your existing PAYE tax code. To qualify, you must owe less than £3,000 on your tax bill. You must also submit any paper return by 31 October or an online return by 30 December.

The deadline for payment of any Income Tax and NICs is 31st January of the year following the tax year to which it applies, so the same date for filing your online tax return. If your tax bill is over £1,000, you will also need to make a payment on account by the same date to cover your potential tax liabilities for the year ahead. This will be assessed at 50% of your bill, payable in two instalments. The second instalment will be due on 31 July.

The deadline for filing your self-assessment is strict. This means that if you are late in filing your return, you will be automatically charged a penalty of £100, with additional penalties at specific intervals, for example, if your return is more than 3, 6 or 12 months late.

Equally, if you are late in paying your tax bill, you may again be charged a penalty, so you must factor in any payment processing time. Where payment falls over a weekend or bank holiday, your payment must reach HMRC on the last working day before that day. Penalties for late payment can be as much as £750, although the penalty can be up to 100% of your tax bill if you deliberately fail to pay. You will also be charged interest on the outstanding balance. As such, it is important to plan ahead, putting money aside each month to cover your tax and NICs, and not forgetting to budget for any payments on account.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert professional advice should be sought.