What’s the relevance of my marginal rate?

Most people know about the different tax rate bands their income might fall into, but a recent survey found that only 1 in 5 people understood the concept of a ‘marginal rate’.

Your marginal rate is the rate of tax and national insurance you pay on the next £1 you earn. It’s usually the top rate of tax you pay, but because of quirks in our tax system, that’s not always the case.
We think knowing your marginal rate can be a powerful tool to help you make tax decisions, particularly if your annual income is between £100,000 and around £125,000.
Our marginal rate calculator lets you calculate your marginal rate of tax and national insurance.

An example of how your marginal rate works

If you earned £110,000 over the 2020/21 tax year, your marginal rate would be about 62%. This is because personal allowances start to be clawed back once your income exceeds £100,000. This means that for the next £1 earned over £110,000, you’d be left with just 38p. 
As a result, if you were being paid an additional £10,000 bonus at the end of the tax year, and you’d already earned £110,000, you’d be left with around £3,800 after tax, national insurance and the impact on your personal allowances was accounted for!

Things you can do to reduce your marginal rate

Knowing your marginal rate means that you can start thinking about making decisions to help optimise your tax liabilities. For example, by making additional pension contributions, exploring bonus or salary sacrifice options, or making donations to charity. All of these things can potentially help reduce your marginal rate. This is because HMRC lets you deduct these things from your income when checking to see if it goes over the £100,000 threshold.
We’ve built a free marginal rate calculator so you can easily calculate your marginal rate and use this information to help you make more informed tax decisions. We’ve also written a blog about this here.
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