Marginal Rate
The rate of tax paid on the next pound of income you earn, which determines the tax cost or saving of earning slightly more or less. In the UK, the marginal rate can exceed the stated tax band rate — for example, income between £100,000 and £125,140 faces an effective 60% marginal rate because the Personal Allowance is simultaneously withdrawn at £1 for every £2 earned. Understanding your marginal rate is essential for decisions about pension contributions, salary sacrifice, and dividend planning.
How it works
Your marginal rate isn't always the same as the headline rate for the band you're in, because several UK tax mechanisms withdraw allowances or benefits as income rises, effectively stacking an extra tax on top of the stated rate. The Personal Allowance taper between £100,000 and £125,140 is the best-known example, but similar effects occur wherever a benefit, allowance, or threshold is withdrawn gradually as income increases, such as around the High Income Child Benefit Charge.
Marginal rate is the number that matters most for decisions about whether it's worth earning more — accepting a bonus, taking on freelance work, or increasing your hours — because it tells you what proportion of that specific extra income you'll actually keep. It's also the rate used to work out how much a pension contribution or Gift Aid donation is worth to you in tax relief, since both are calculated against the rate you'd otherwise pay on that slice of income.
Because marginal rate spikes can be so much higher than the headline band rate suggests, financial advisers often specifically target these high-marginal-rate zones — like the £100,000-£125,140 band — for pension contributions or salary sacrifice, since reducing income within that band produces a bigger tax saving than the same reduction would elsewhere.
Example: The 60% marginal rate zone
Suppose your income is £110,000 and you earn an extra £1,000 through a bonus. That £1,000 is taxed at the higher rate of 40%: £1,000 × 40% = £400.
Because you're within the £100,000-£125,140 band, the Personal Allowance also tapers by £1 for every £2 of extra income, so £500 of your Personal Allowance is withdrawn and becomes taxable at 40%: £500 × 40% = £200. Total tax on the extra £1,000: £400 + £200 = £600 — a 60% marginal rate.
Frequently asked questions
Why is my marginal tax rate higher than my income tax band suggests?
Because certain thresholds — most notably the Personal Allowance taper between £100,000 and £125,140 — withdraw an allowance as your income rises, adding an extra layer of tax on top of the standard band rate.
Is marginal rate the same as effective rate?
No — marginal rate is the tax on your next pound earned, while effective rate is the average rate across all of your income; the two only converge for someone whose entire income falls within a single band.
Does marginal rate affect how much a pension contribution is worth?
Yes — pension tax relief is worth more the higher your marginal rate is, which is why contributions made within a high-marginal-rate zone like the Personal Allowance taper band can be particularly effective.
Related Terms
Effective Rate
The average rate of tax you pay across all your income, calculated by dividing your total tax bill by your gross income.
Basic Rate
The standard income tax rate of 20% applied to taxable income between the Personal Allowance and the higher-rate threshold, currently £12,571 to £50,270 in England, Wales, and Northern Ireland.
Higher Rate
The income tax rate of 40% applied to taxable income above £50,270 up to £125,140 in England, Wales, and Northern Ireland.
Additional Rate
The highest income tax rate in England, Wales, and Northern Ireland, charged at 45% on taxable income above £125,140.
Personal Allowance Taper
The gradual withdrawal of the Personal Allowance for people with adjusted net income above £100,000, reducing it by £1 for every £2 of income above that level.
Try the calculator
Use our free tool to see how marginal rate affects your tax.