Tax Bracket

Marginal rate versus effective rate

The single most persistent myth about income tax is that moving into a higher bracket costs you money. It cannot. Only the income above the threshold is taxed at the higher rate, and your effective rate is always lower than your marginal one.

How it works

• Applies each rate only to the slice of income that falls inside its band.
• Reports the marginal rate — what the next unit of income is taxed at — separately from the effective rate.
• Shows how much of a raise you actually keep, which is the question people are really asking.

tax = Σ (income within each band × that band's rate)

marginal rate  = rate on the next unit earned
effective rate = total tax ÷ total income

effective is always below marginal in a progressive system

Worked example

A three-band system: 0% to 10,000, 20% from 10,000 to 40,000, 40% above — on an income of 60,000.

1. first 10,000 at 0% = 0
2. next 30,000 at 20% = 6,000
3. remaining 20,000 at 40% = 8,000
4. total tax = 14,000
5. effective rate = 14,000 ÷ 60,000 = 23.3%

Marginal rate 40%, effective rate 23.3%. A 5,000 raise is taxed at 40%, so 2,000 goes in tax and you keep 3,000 — less than the headline but unambiguously more than before.

Reading the result

• Crossing a bracket never reduces take-home pay. Only the portion above the threshold is taxed higher. Someone earning one unit into the 40% band pays 40% on that single unit, not on everything.
• Real cliff edges do exist, but they come from benefit withdrawal rather than tax bands. Losing a child benefit or an allowance at a fixed income point can produce a genuine marginal rate above 100% — that is worth modelling separately, and it is not what a tax bracket does.
• Social contributions often have their own thresholds and caps that do not line up with income tax bands. Above a contribution ceiling your true marginal rate can fall rather than rise.
• Pension contributions typically come out of the top slice, so they relieve tax at your marginal rate. Contributing 1,000 when your marginal rate is 40% costs you 600 of take-home.

Common questions

Will a raise push me into a higher bracket and leave me worse off?

No. Only the amount above the threshold is taxed at the higher rate. In the example above, a 5,000 raise at a 40% marginal rate still leaves you 3,000 better off. The belief that a raise can reduce net pay comes from benefit cliffs, not from tax bands.

Which rate should I use when planning?

Marginal for any decision about additional income — overtime, a bonus, a side contract, a pension contribution — because that is the rate that applies to the extra amount. Effective only for understanding your overall tax burden.