Effective rate vs marginal rate

Your effective rate is the average

Your effective rate is all the tax you pay, as a share of all the money you earn. It is low because the tax system works in slices. Your first slice of pay is tax-free, the next is taxed at a low rate, and only the top slice reaches the high rates. Average those slices together and the result sits well below the top rate you have reached.

Your marginal rate is the next pound

Your marginal rate is the tax on your next pound of income, nothing else. It is the rate for the band you are standing in, so it is higher than your average. A pay rise, a bonus, an hour of overtime and a pension contribution are all valued at this rate, not the average one. That is why it is the number worth knowing.

Why the gap matters

The average tells you what tax costs you overall. The marginal rate tells you what your next decision is worth. If you are weighing up more hours, a bonus, or a pension contribution, use the marginal rate. It is the rate that money is taxed at, or saved from.

The worked example above shows the two side by side on the same salary. The 42% on the next pound is nearly double the 24% average. That difference is exactly what a pension contribution turns to your advantage.

Where the two rates pull furthest apart

The gap is widest in the hidden bands most tables do not show. Between £100,000 and £125,140 losing your Personal Allowance pushes the marginal rate to about 62%, while the average stays far lower. The Child Benefit charge does the same thing on a smaller scale between £60,000 and £80,000. In both, your next pound is taxed far harder than your headline band suggests, which is the whole case for acting.

See your own two rates

The calculator shows both rates for your own salary, side by side, and marks where you sit on the marginal-rate curve. Put your salary in and see the average you pay and the rate on your next pound.