Do you mean image uploads to posts or for avatars?
For posts, ACP search for "Attachments". It may be that you have set the Maximum Attachment File Size to 40Kb? If so, increase it.
For avatars, this is controlled by user group permissions. Change the "Maximum large avatar file size" for the Registered group to something larger (note that the sizing is in bytes so 40Kb is 40960 bytes). For other user groups, set the value to 0 unless you want a higher value (the highest value is the one that will apply).
Options -> Attachments -> Maximum Attachment File Size, which by default is 1mb so the 40kb limit is likely added by your php configuration. Try changing the values of these two settings in your php.ini if you can, otherwise you'll have to contact your host probably