What a marginal rate actually means

The most common tax mistake is believing that crossing into a higher band raises the tax on everything you earn. It does not, and the belief costs people real money when they turn down overtime or a raise to avoid it.

Bands are steps, not cliffs

Income tax works in slices. The first slice is taxed at nothing, the next at a basic rate, the next at a higher rate, and so on. When your income crosses a threshold, only the part above the threshold is taxed at the new rate. The slices below it are untouched.

A worked example

Suppose the basic rate is twenty percent up to 50,000 and forty percent above it. Someone earning 49,000 pays twenty percent on their taxable income. Someone earning 51,000 pays twenty percent on the first 50,000 and forty percent on the last 1,000, which is 400 rather than 200. They keep 600 of the extra 2,000. They are better off, just by less than they expected.

Where cliffs do exist

Some benefits and allowances are withdrawn all at once above a threshold rather than tapered, and there the effective rate on a single pound can be far higher than any headline band. These are worth knowing about and are listed in the questions below. They are the exception, and they are about withdrawal, not about the tax bands themselves.

The number to know

Your marginal rate: what you keep of the next pound. It decides whether overtime is worth it, whether a pension contribution is cheap, and whether a raise is as big as it looks. It is almost never the number on your payslip.