Something is wrong here - you don't have to 'earn' income and you don't have to pay higher-rate tax on 'unearned' income. Everyone has an personal allowance and they will pay no tax on any income up to this amount. Ballpark figures are £5300 tax-free, 20% tax on income between that and £36500, and higher-rate (40%) on earnings over that amount.
I can't see why you'd have to pay 40% tax on everything your earn? Are you employed at the moment, and if so what is your tax code on the payslips? Have you spoken to an accountant? I would think very seriously about this, a morning with an accountant looking over your statements etc could save you hundreds if not thousands, as it sounds like your tax status is a complete balls-up at the moment. You may even be able to claim back tax from HMRC...
Everyone's tax code is different but you are right as it depends on what you have paid in the previous financial year but the standard code is 543L. The initial sum you can earn before being taxed for a person aged up to 64 is £5435 as of April 5 2008. 65-74 is £9030 with a earning limit of £21800. 75 + is £9180 with an earning limit of £21800 also.
Anyone who isnt sure what the earning limit is for people 65 and over. This is a limit for what you can earn, if you earn over this then they will take £1 for every £2 that you are over and deduct it from your tax allowance.
Sorry for going off topic