The short version: Your marginal tax rate is the rate you pay on your next pound of income. It’s the highest band your earnings reach, not the rate you pay on everything.
How does it work?
Income Tax is charged in bands. Your first chunk is tax free (the Personal Allowance). The next chunk is taxed at the basic rate. Earn more and the next portion is taxed at the higher rate. Your marginal rate is whichever band your top earnings fall into.
Why does it matter?
Understanding your marginal rate helps you make decisions. If you’re a higher rate taxpayer, every extra pound you earn costs you 40p in tax. That affects whether overtime is worth it, how valuable pension contributions are, and whether to take dividends or salary.
What are the rates?
Check gov.uk for current thresholds, but broadly there’s a Personal Allowance at 0%, then basic rate, higher rate, and additional rate for very high earners. The Personal Allowance also starts reducing once you earn above a certain level, which can create an effective marginal rate even higher than 45%.
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