A marginal tax rate, also known as the progressive tax rate, is the amount of tax rate that applies to a certain tax bracket of a taxpayer’s income or other taxable income for which he or she qualifies. It’s the amount deducted from a taxpayer’s next pound of taxable income above a certain threshold.

The marginal tax rate increases as the individual’s income increases. The primary goal of marginal tax rates is to tax people based on their income, with lower-income people paying lower rates than higher-income people.

A marginal tax system is made up of a set of income brackets, each of which has its own tax rate. The tax rate will remain the same until the taxpayer’s income rises to the next highest taxable income bracket.

In any given tax year, the amount of income tax owed is determined by two primary factors:

  • The percentage of your salary that is included in your personal allowance (PA)
  • The sum of untaxed income in each tax bracket

The PA is actually £12,500 for most big corporations. An individual is not required to pay any tax on this amount. The ‘marginal rate’ of tax is the amount of tax charged on earnings for the next pound gained after that.

In the United Kingdom, there is a “progressive” taxation system. This ensures that income above a certain threshold is subject to taxation. It does not imply that if you receive £200,000, you must pay 50% of the total amount. After deducting the personal allowance, you only have to pay 50% on earnings above £150,000.

Significance of Marginal Tax Rate

When it comes to financial planning, marginal tax rates are crucial. Taxpayers must understand marginal tax rates to determine how much of their raises or bonuses they can keep after deducted taxes. It also helps taxpayers determine how much they should put into their savings accounts to receive tax benefits.

Marginal income tax rates

Tax BandTaxable IncomeTax Rate
Personal AllowanceUp to £12,5000%
Basic Rate£12,501 to £50,00020%
Higher Rate£50,001 to £150,00040%
Additional RateOver £150,00045%

How to Reduce Marginal Taxes

How to Reduce Marginal Taxes

There are many options for obtaining marginal tax relief. The following are some examples of standard marginal tax relief calculations:

  • Transferring properties to your partner, such as dividend income
  • Investing in Individual Savings Accounts (ISAs)
  • To manage payments, you can operate as a limited company.
  • Increasing your contributions to a pension fund
  • Salary profits exchanged for non-cash benefits.
  • Donating to charitable organisations