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Marginal tax rate

Marginal Tax Rate

Marginal tax rate defines the amount of tax an individual has to pay on the higher income amount. Once an individual’s income reaches a certain threshold, he/she will have to pay a higher percentage of tax – it is the maximum rate an individual will have to pay

Once an individual is aware of his/her personal allowance , the entire extra earnings will be subject to income tax. For the tax year 2017/18, marginal income tax bands are divided in three categories – basic rate of 20%, higher rate of 40%, and an additional rate tax bracket of 45% (personal allowance starts to reduce once an individual’s earnings reach £100,000). As per the tax rules, every two pounds a taxpayer earns in excess of £100,000, his/her tax-free personal allowance (PA) is decreased by one pound. This implies that if an individual’s income is between £100,000 and £120,000, then he/she is essentially taxed at a marginal rate of 60%. If an individual stays in Scotland, the tax rate for higher income is locked at a threshold at previous year's levels for the tax year 2017/18 tax year

Income tax rate 2017/18

Earnings (if an individual stays in England, Wales Or Northern Ireland) Tax rate for tax year 2017/18
Under personal allowance (PA)of £11,500 No income tax payable
In the middle of PA and PA+£33,500 (basic rate) Ranging from £11,500 to £45,000 20%
In the middle of PA+£33,500 and £150,000 (higher rate) Ranging from £45,000 to £150,000 40%
In excess of £150,000 (additional rate) 45%
Earnings (if an individual stays in Scotland) Tax rate for tax year 2017/18
Under personal allowance (PA)of £11,500 No income tax payable
In the middle of PA and PA + £31,500 (basic rate) Ranging from £11,500 to £43,000 20%
In the middle of PA+£31,500 and £150,000 (higher rate) Ranging from £45,000 to £150,000 40%
In excess of £150,000 (additional rate) 45%

Marginal tax rate bands means that an individual will have to pay a defined tax rate on a portion of salary. For example, if an individual’s salary falls in the 40% tax bracket (in excess of PA + £33,500 in the tax year 2017/18), then an individual will only have to pay 40% tax on the portion of earnings in a particular income tax band. For the lower earnings section, an individual will pay the applicable 20% or 0%

Marginal rate of tax is the rate an individual will pay on the next pound they earn. It is imperative to understand that marginal rate should not be jumbled with effective tax rate – An effective rate of tax takes into consideration a taxpayer’s earnings that will also be effectually taxed. This taxation is due to other allowances that are removed as earnings increase. On the other hand, certain income is not taxed at all primarily due to personal allowance. Additional income will be taxed at 20% tax rate, 40% tax rate, some probably as high as 64.75%, when Child Benefit is taken out , and then 45% as earnings exceed £150,000. Hence, the actual tax rate is defined as the rate at which income is taxed, considering all tax bands and reductions in allowances

The total amount of tax is the entire amount of tax (stated as an absolute value and not a percentage) that an individual will pay to HM Revenue and Customs (HMRC) during a tax year or an accounting period (this is subject to deducting any credits or allowances). In the UK, an accounting period for individual taxation ranges from April to March. The total tax an individual pays will be computed in his/her self-assessment tax return , and will consider income from all sources
For example, if an employee claims no expenses, then:

  • An individual can earn up to £10,000 before he/she is liable to pay any income tax – the personal allowance. Here, the marginal tax rate is NIL (discounting National Insurance (NI) contributions)
  • Earnings between £11,500 and £45,000 (2017/18 rates), an individual pays 20% income tax on earnings, hence, marginal rate is 20%
  • Earnings between £45,000 to £150,000 are taxed at 40%, and the marginal rate is 40%
  • Earnings in excess of £150,000 are taxed at 45%, hence, the marginal rate is 45%


Income tax liabilities, by income source, tax band and marginal rate, 2017-18

Amounts: £ million

Starting rate (1) taxpayers "Savers" rate (2) taxpayers Basic rate (3) taxpayers Higher rate (4) taxpayers Additional rate (5) taxpayers All taxpayers
Tax liability after allowances given as income tax reductions (6)
Tax on Earnings:
Basic rate - - 57,400 25,400 2,330 85,100
Higher rate - - - 31,900 15,200 47,100
Additional rate - - - - 28,500 28,500
Tax on Savings:
Starting rate - - - - - -
Basic rate - 37 163 94 8 293
Higher rate - - - 348 101 449
Additional rate - - - - 364 364
Tax on dividends (after personal dividend allowance) (7):
Ordinary rate - 692 344 634 14 1680
Higher rate - - - 4,640 1020 5650
Additional rate - - - - 3,680 3,680
Allowances given as tax reductions - 2 190 329 1,490 2,010
Tax liability after allowances given as income tax reduction - 720 58,000 63,000 51,300 173,000
Average Rate of Tax % - 3-6 9-6 21-7 37-8 16-5
Average amount of tax £ - 1,170 2,300 15,100 141,000 5,710

From 2017-18, individuals who are categorised as Scotland resident and have overall taxable income in excess of the Scottish Basic Rate Limit (BRL) but lower than the UK government’s BRL have their marginal rate grouping based on the earnings within this estimated band. For such individuals, non-savings non-dividend (NSND) earnings falling in this range are taxed at a higher rate, however, dividends and savings income is taxed at the basic rate. A taxpayer in Scotland with any taxable NSND income falling in this band (but no complete taxable income in excess of the UK BRL) is categorised as a Higher Rate taxpayer. A Scottish taxpayer with only dividends or savings income within this band (and no total taxable income above the UK BRL) is categorised as a Basic Rate taxpayer

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