Marginal Tax Rate

Understanding Your Marginal Rate

Your marginal tax rate is the rate of tax you pay on the next pound you earn. It is different from your average (effective) tax rate. For most UK workers, the marginal rate is either 32% (20% tax + 12% NI in the basic band) or 42% (40% tax + 2% NI in the higher band).

However, there are hidden marginal rates that can be much higher. Between £100,000 and £125,140, the personal allowance taper creates a 60% effective marginal rate. If you also have student loan repayments (9%), your marginal rate in this zone can reach 69%. See our £100K tax trap guide.

Knowing your marginal rate is essential for financial decisions. It tells you the true cost of earning more (or the true saving from pension contributions). Use our calculator to see your exact marginal rate at your salary level.

How Marginal Rate Works in Practice

Your marginal tax rate is the rate of tax you pay on the next pound you earn. This is different from your average (effective) tax rate. In the UK, marginal rates are: 0% (up to Personal Allowance), 20% (basic rate), 40% (higher rate), 45% (additional rate). However, when National Insurance is included, the effective marginal rates become approximately 28% (basic), 42% (higher), and 47% (additional).

Practical Tips

Understanding your marginal rate is crucial for financial decisions. If you are a higher-rate taxpayer, every £100 of pension contribution saves you £40 in income tax. A pay rise from £50,000 to £55,000 gives you approximately £58 per extra £100 (after 40% tax and 2% NI). The most punishing marginal rate is 60%, which applies between £100,000 and £125,140 due to the Personal Allowance taper.

Related Topics

Marginal rates create planning opportunities. For example, reducing income from £102,000 to £100,000 through pension contributions saves far more than £800 in tax (approximately £1,600 due to the 60% marginal rate). See Personal Allowance taper.