What is the marginal rate of tax?#AskAMS

The marginal rate of tax paid is “the percentage of tax paid on earnings for the next pound earned.” What that means is that if you earn £50,000 your marginal rate of tax is 40% because for the next pound that you earn, you will be paying tax at 40%. Below are the HMRC rates for 2020/21 (different rates if you live in Scotland):

Band                                    Taxable income                Tax rate

Personal Allowance              Up to £12,500                      0%

Basic rate                              £12,501 to £50,000             20%

Higher rate                            £50,001 to £150,000           40%

Additional rate                       over £150,000                     45%

When your income reaches £100,000 you start to lose your tax-free personal allowance (‘PA’). Your PA is withdrawn at the rate of £1 for every £2 you earn over £100,000. The net effect of that is you are liable for an additional 20% tax on earnings between £100,000 and £125,000. That’s on top of the 40% tax you already owe, making your marginal tax rate on the amount over £100,000, a huge 60%.

If you are entitled to child benefit, that entitlement will also be gradually withdrawn once your income reaches £50,000. The result again is that your marginal rate will increase depending on how many children you have, and your circumstances. It could go up to as much as 64.75%. And that makes a big difference to your tax bill.

Seeking specialist advice may help you mitigate the effects of your marginal tax rate, some examples would be to restructure your income – perhaps using your spouse’s allowances, salary sacrifice, additional pension contributions and charitable donations.

Find out more HERE!