Marginal Rate
The rate of tax you pay on your next pound of income, which can be higher than your effective rate due to allowance withdrawal.
Key Points
- ✓Tax rate on your next pound of income
- ✓Includes Income Tax + National Insurance (+ Student Loan if applicable)
- ✓60% trap between £100k-£125k due to Personal Allowance withdrawal
- ✓Different from your effective/average tax rate
- ✓Crucial for financial planning decisions
Detailed Explanation
Your Marginal Rate is the tax rate you pay on your next pound of income. It's different from your effective (average) tax rate and is crucial for making financial decisions about overtime, bonuses, or Pension Contribution.
For most people, Marginal Rate equals their highest Income Tax rate plus National Insurance: 32% for Basic Rate Tax payers (20% + 12%), 42% for Higher Rate Tax payers (40% + 2%), and 47% for Additional Rate Tax payers (45% + 2%).
However, the highest Marginal Rate in the UK is actually 60%, applying to income between £100,000 and £125,140. This is because every £2 earned reduces your Personal Allowance by £1, effectively adding an extra 20% tax.
If you have a Student Loan, add 9% (or 6% for postgraduate). A Higher Rate Tax payer with a Plan 2 Student Loan has a Marginal Rate of 51% (40% + 2% + 9%).
Understanding your Marginal Rate helps you make better financial decisions. For example, a £1,000 pension contribution saves £600 for someone in the 60% bracket, but only £320 for a Basic Rate Tax payer.
Practical Examples
- •Basic Rate Tax payer: 20% Income Tax + 12% National Insurance = 32% Marginal Rate
- •Earner at £110,000: 40% + 2% + 20% (allowance loss) = 62% Marginal Rate on next £15,140
- •Higher Rate Tax payer with Plan 2 Student Loan: 40% + 2% + 9% = 51% Marginal Rate
Frequently Asked Questions
Related Terms
Income Tax
A progressive tax on your earnings, charged at 20%, 40%, or 45% depending on your income level (after personal allowance).
National Insurance (NI)
Mandatory contributions that fund State benefits including the State Pension, charged at different rates for employees, employers, and self-employed.
Personal Allowance
The amount of income you can earn tax-free each year (£12,570 for 2024/25), reduced if you earn over £100,000.
Higher Rate Tax
Income Tax charged at 40% on income between £50,271 and £125,140 (2024/25).
Additional Rate Tax
The highest Income Tax band in the UK, charged at 45% (47% in Scotland) on income over £125,140.