Marginal Tax Rate
IntermediateThe marginal tax rate is the rate of tax paid on the next unit of income earned. It is the rate of the tax bracket that a person's top slice of income falls into.
In a progressive tax system, different parts of income are taxed at different rates. The marginal tax rate tells you what happens to an extra unit of income, such as a pay rise, a bonus or overtime.
For example, under a hypothetical system where income above 40,000 is taxed at 20%, someone earning 50,000 has a marginal tax rate of 20%. If they receive a bonus of 1,000, they will pay 200 of income tax on it and keep 800.
The marginal rate is useful for many decisions. It shows how much a deduction is worth, because a deduction of 1,000 saves tax at the marginal rate. It also shows how much of a pay rise you will keep and how valuable tax-advantaged savings are.
The marginal rate is usually higher than the average or effective tax rate, because lower slices of income are taxed at lower rates. In practice, the true marginal rate can also include social security contributions and the withdrawal of benefits or allowances as income rises, so it can be higher than the headline bracket rate.
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