diff --git a/public/app/plugins/panel/timeseries/plugins/ThresholdControlsPlugin.tsx b/public/app/plugins/panel/timeseries/plugins/ThresholdControlsPlugin.tsx
index 3be5e750016..6071bf912cf 100644
--- a/public/app/plugins/panel/timeseries/plugins/ThresholdControlsPlugin.tsx
+++ b/public/app/plugins/panel/timeseries/plugins/ThresholdControlsPlugin.tsx
@@ -54,16 +54,15 @@ export const ThresholdControlsPlugin: React.FC<ThresholdControlsPluginProps> = (
       if (Number.isNaN(yPos) || !Number.isFinite(yPos)) {
         continue;
       }
-      if (yPos < 0 || yPos > plot.bbox.height / window.devicePixelRatio) {
-        continue;
-      }
+
+      const height = plot.bbox.height / window.devicePixelRatio;
 
       const handle = (
         <ThresholdDragHandle
           key={`${step.value}-${i}`}
           step={step}
           y={yPos}
-          dragBounds={{ top: 0, bottom: plot.bbox.height / window.devicePixelRatio }}
+          dragBounds={{ top: 0, bottom: height }}
           mapPositionToValue={(y) => plot.posToVal(y, scale)}
           formatValue={(v) => getValueFormat(scale)(v, decimals).text}
           onChange={(value) => {
@@ -80,6 +79,7 @@ export const ThresholdControlsPlugin: React.FC<ThresholdControlsPluginProps> = (
           }}
         />
       );
+
       handles.push(handle);
     }
 
diff --git a/public/app/plugins/panel/timeseries/plugins/ThresholdDragHandle.tsx b/public/app/plugins/panel/timeseries/plugins/ThresholdDragHandle.tsx
index 26ef7e18307..33430101ad8 100644
--- a/public/app/plugins/panel/timeseries/plugins/ThresholdDragHandle.tsx
+++ b/public/app/plugins/panel/timeseries/plugins/ThresholdDragHandle.tsx
@@ -1,9 +1,11 @@
-import React, { useState } from 'react';
+import React, { useMemo, useState } from 'react';
 import { css } from '@emotion/css';
 import { Threshold, GrafanaTheme2 } from '@grafana/data';
 import { useStyles2, useTheme2 } from '@grafana/ui';
 import Draggable, { DraggableBounds } from 'react-draggable';
 
+type OutOfBounds = 'top' | 'bottom' | 'none';
+
 interface ThresholdDragHandleProps {
   step: Threshold;
   y: number;
@@ -22,10 +24,33 @@ export const ThresholdDragHandle: React.FC<ThresholdDragHandleProps> = ({
   onChange,
 }) => {
   const theme = useTheme2();
-  const styles = useStyles2(getStyles);
+  let yPos = y;
+  let outOfBounds: OutOfBounds = 'none';
+
+  if (y < (dragBounds.top ?? 0)) {
+    outOfBounds = 'top';
+  }
+
+  // there seems to be a 22px offset at the bottom where the threshold line is still drawn
+  // this is probably offset by the size of the x-axis component
+  if (y > (dragBounds.bottom ?? 0) + 22) {
+    outOfBounds = 'bottom';
+  }
+
+  if (outOfBounds === 'bottom') {
+    yPos = dragBounds.bottom ?? y;
+  }
+
+  if (outOfBounds === 'top') {
+    yPos = dragBounds.top ?? y;
+  }
+
+  const styles = useStyles2((theme) => getStyles(theme, step, outOfBounds));
   const [currentValue, setCurrentValue] = useState(step.value);
-  const bgColor = theme.visualization.getColorByName(step.color);
-  const textColor = theme.colors.getContrastText(bgColor);
+
+  const textColor = useMemo(() => {
+    return theme.colors.getContrastText(theme.visualization.getColorByName(step.color));
+  }, [step.color, theme]);
 
   return (
     <Draggable
@@ -37,13 +62,10 @@ export const ThresholdDragHandle: React.FC<ThresholdDragHandleProps> = ({
         return false;
       }}
       onDrag={(_e, d) => setCurrentValue(mapPositionToValue(d.lastY))}
-      position={{ x: 0, y }}
+      position={{ x: 0, y: yPos }}
       bounds={dragBounds}
     >
-      <div
-        className={styles.handle}
-        style={{ color: textColor, background: bgColor, borderColor: bgColor, borderWidth: 0 }}
-      >
+      <div className={styles.handle} style={{ color: textColor }}>
         <span className={styles.handleText}>{formatValue(currentValue)}</span>
       </div>
     </Draggable>
@@ -52,32 +74,38 @@ export const ThresholdDragHandle: React.FC<ThresholdDragHandleProps> = ({
 
 ThresholdDragHandle.displayName = 'ThresholdDragHandle';
 
-const getStyles = (theme: GrafanaTheme2) => {
+const getStyles = (theme: GrafanaTheme2, step: Threshold, outOfBounds: OutOfBounds) => {
+  const mainColor = theme.visualization.getColorByName(step.color);
+  const arrowStyles = getArrowStyles(outOfBounds);
+  const isOutOfBounds = outOfBounds !== 'none';
+
   return {
     handle: css`
+      display: flex;
+      align-items: center;
       position: absolute;
       left: 0;
       width: calc(100% - 9px);
       height: 18px;
-      margin-left: 9px;
       margin-top: -9px;
+      border-color: ${mainColor};
       cursor: grab;
+      border-top-right-radius: ${theme.shape.borderRadius(1)};
+      border-bottom-right-radius: ${theme.shape.borderRadius(1)};
+      ${isOutOfBounds &&
+      css`
+        margin-top: 0;
+        border-radius: ${theme.shape.borderRadius(1)};
+      `}
+      background: ${mainColor};
       font-size: ${theme.typography.bodySmall.fontSize};
       &:before {
-        content: '';
-        position: absolute;
-        left: -9px;
-        bottom: 0;
-        width: 0;
-        height: 0;
-        border-right-style: solid;
-        border-right-width: 9px;
-        border-right-color: inherit;
-        border-top: 9px solid transparent;
-        border-bottom: 9px solid transparent;
+        ${arrowStyles};
       }
     `,
     handleText: css`
+      text-align: center;
+      width: 100%;
       display: block;
       text-overflow: ellipsis;
       white-space: nowrap;
@@ -85,3 +113,51 @@ const getStyles = (theme: GrafanaTheme2) => {
     `,
   };
 };
+
+function getArrowStyles(outOfBounds: OutOfBounds) {
+  const inBounds = outOfBounds === 'none';
+
+  const triangle = (size: number) => css`
+    content: '';
+    position: absolute;
+
+    bottom: 0;
+    top: 0;
+    width: 0;
+    height: 0;
+    left: 0;
+
+    border-right-style: solid;
+    border-right-width: ${size}px;
+    border-right-color: inherit;
+    border-top: ${size}px solid transparent;
+    border-bottom: ${size}px solid transparent;
+  `;
+
+  if (inBounds) {
+    return css`
+      ${triangle(9)};
+      left: -9px;
+    `;
+  }
+
+  if (outOfBounds === 'top') {
+    return css`
+      ${triangle(5)};
+      left: calc(50% - 2.5px);
+      top: -7px;
+      transform: rotate(90deg);
+    `;
+  }
+
+  if (outOfBounds === 'bottom') {
+    return css`
+      ${triangle(5)};
+      left: calc(50% - 2.5px);
+      top: calc(100% - 2.5px);
+      transform: rotate(-90deg);
+    `;
+  }
+
+  return '';
+}