Marginal vs effective tax rate

Your marginal rate applies to the next slice of income. Your effective rate measures tax across the whole amount. They answer different questions.

Updated 28 July 2026UK context7-minute read

Two rates, two useful questions

Marginal tax rateThe Income Tax rate applied to the next pound of taxable income within the current band.

Effective tax rateTotal Income Tax divided by the relevant total income measure. It averages lower and higher bands together.

A person can have a 40% marginal Income Tax rate while their effective Income Tax rate is much lower because part of their income is covered by an allowance and earlier taxable slices face lower rates.

Moving into a higher band does not re-tax everything

UK Income Tax is progressive. For England, Wales and Northern Ireland in 2026/27, taxable income after allowances fills the basic-rate band first, then the higher-rate band. If £100 enters a higher band, the new rate applies to that £100, not retrospectively to the earlier salary.

Common myth: “A raise can leave me worse off because my whole salary moves into the next tax band.” Ordinary band progression does not work that way. Other withdrawals or charges can create unusual marginal effects, but the next band alone does not reduce total net pay.

Why the marginal deduction on a raise may exceed the Income Tax rate

A payslip can deduct more than Income Tax. The next pound may also face employee National Insurance and student-loan repayment. Pension contributions linked to salary may rise too. Adding those effects gives a marginal payroll-deduction rate, which is different from a marginal Income Tax rate.

Between £100,000 and £125,140 of adjusted net income, the standard Personal Allowance falls by £1 for every £2 above £100,000. That withdrawal means additional taxable income is created as earnings rise, producing a higher effective marginal Income Tax effect in that range. Pension and Gift Aid treatment can affect adjusted net income, so individual advice may be valuable.

How to calculate an effective rate

A simple Income Tax effective rate is:

Total Income Tax ÷ gross income × 100

Be precise about the numerator. If you add employee National Insurance, loans and pension, call the result an effective deduction rate rather than an Income Tax rate. A pension contribution is saving into your pension, not a tax, even though it reduces current cash pay.

Which rate should you use?

Budgeting: use estimated net cash, not either rate alone.
Evaluating a raise: compare net pay before and after, which captures marginal deductions in the model.
Comparing tax burden: use a clearly defined effective rate.
Understanding the next pound: examine marginal Income Tax plus other deductions that actually apply.

Use the pay rise calculator for a standard before-and-after UK estimate, then add pension and loans in the full calculator.