Two people can look at the same payslip and describe its tax in two completely different percentages, and both can be right. One is talking about the marginal rate, the rate on the next pound earned. The other is talking about the effective rate, the share of total income lost to tax overall. Mixing them up leads to bad decisions: turning down a pay rise, mispricing freelance work, or misjudging how much a pension contribution saves. This guide pins down both rates, shows why they diverge, and explains which one to use for which decision. We use round illustrative numbers throughout.
Two questions, two rates
Every tax conversation is secretly answering one of two different questions:
- “How much of my whole income goes to tax?” That is the effective rate (also called the average rate). It is total tax divided by total income.
- “If I earn one more pound, how much of it do I keep?” That is the marginal rate. It is the rate that applies to your next slice of income.
Because the UK taxes income in stacked bands, with each higher slice taxed at a higher rate, these two numbers are almost never equal. Your marginal rate reflects only the top band you have reached. Your effective rate blends every band beneath it.
A worked example with round numbers
Suppose, using simple illustrative figures:
- The first £12,000 is tax free.
- The next £38,000 is taxed at 20%.
- Income above £50,000 is taxed at 40%.
Take someone earning £70,000.
| Slice | Range | Rate | Tax |
|---|---|---|---|
| Tax-free | First £12,000 | 0% | £0 |
| Basic band | Next £38,000 | 20% | £7,600 |
| Higher band | Final £20,000 | 40% | £8,000 |
| Total | £70,000 | £15,600 |
Now read off both rates:
- Marginal rate: their next pound lands in the 40% band, so their marginal rate is 40%.
- Effective rate: £15,600 of tax on £70,000 of income is about 22.3%.
Same person, same income, two valid numbers: 40% and 22.3%. The marginal rate is much higher because it ignores all the lightly taxed income beneath the top slice. The effective rate is lower because it averages everything in. Our income tax calculator shows both figures for any salary.
Why the effective rate is always lower than the top marginal rate
The effective rate is a weighted average of every band your income passes through. As long as some of your income sits in the tax-free portion and the lower bands (which it always does, because income fills from the bottom up), the average is dragged below your top band. The only way the two could meet is if every pound were taxed at the same single rate, which the banded system never does.
This also explains a comforting fact: as your income rises into a higher band, your effective rate climbs gradually, not in a jump, because only the new top slice is taxed at the higher rate while the rest stays where it was.
Why marginal rate is the number for decisions
When you are deciding whether to do something that changes your income at the margin, a pay rise, an extra freelance project, overtime, a bonus, or a pension contribution, the effective rate is irrelevant. What matters is what happens to the next pound. That is the marginal rate.
Examples:
- Evaluating a pay rise: if your marginal rate is 40%, a £1,000 rise nets you £600 before National Insurance, regardless of your 22% effective rate. Judging it against the effective rate would overstate what you keep.
- Pricing freelance work: extra self-employed profit stacks on top of your salary and is taxed at your marginal rate, not your average. A side project may be taxed entirely at the higher rate even though your overall effective rate is modest.
- Valuing a pension contribution: tax relief on a contribution is given at your marginal rate. Someone with a 40% marginal rate gets far more relief per pound than the effective rate would suggest. Our pension tax relief calculator values this at your income.
The rule of thumb: use the effective rate to describe your overall burden, and the marginal rate to make any decision about earning or contributing more.
National Insurance changes the marginal picture
So far we have spoken only of income tax. In reality your true marginal rate on earned income usually includes National Insurance, which has its own thresholds stacked alongside income tax. The combined marginal rate, what you actually lose on the next pound, is the income tax band rate plus the National Insurance rate that applies at that income level.
This combination produces some non-obvious results. Because employee National Insurance steps down to a low rate on high earnings while income tax steps up, the combined marginal rate does not rise smoothly everywhere. In the band where the main National Insurance rate and the basic income tax rate overlap, the combined marginal rate is higher than the headline income tax rate alone. Higher up, where National Insurance has dropped to its small top rate, the jump from basic to higher income tax is partly offset. Our take-home pay calculator shows the combined effect across a whole salary.
The marginal rate is not always the headline band
A crucial subtlety: your marginal rate can be higher than any published income tax band because of allowance withdrawals and benefit charges layered on top.
The clearest example is the personal allowance taper for high earners, where each extra pound both gets taxed and strips away tax-free allowance, pushing the effective marginal rate to around 60%, well above the headline higher rate. Similar spikes appear around the High Income Child Benefit Charge and certain other thresholds. None of these change your effective rate dramatically, they affect only a band of income, but they make your marginal rate, the number that governs decisions, much higher than the simple band suggests.
This is exactly why the marginal rate is the decision-making number. A pension contribution made inside the allowance-withdrawal zone earns relief at that elevated marginal rate, making it unusually valuable. Our salary sacrifice calculator captures both the tax and National Insurance saved when you reduce income in these zones.
Reading your own two rates
To find your own numbers from a single salary figure:
- Effective rate: take your total income tax (and, if you want the all-in figure, National Insurance), divide by total income. This tells you the overall share you lose.
- Marginal rate: identify the band your top slice of income sits in, add the National Insurance rate at that level, and adjust upward if you are inside an allowance-withdrawal or benefit-charge zone. This tells you what the next pound costs.
Keeping the two clearly separate stops the most common UK tax mistakes: under-valuing a pay rise by judging it against the average, or over-valuing it by forgetting National Insurance and allowance tapers on the margin.
Frequently asked questions
Which rate should I use to decide if a pay rise is worth it?
The marginal rate. A pay rise changes your income at the margin, so what you keep depends on the rate applied to those extra pounds, not your overall average. Judging a rise against your lower effective rate would overstate the take-home gain.
Why is my effective tax rate so much lower than my tax band?
Because your tax band is your top, marginal band, but most of your income sits in the tax-free portion and lower bands taxed at lower rates. The effective rate averages all of them together, so it always comes out below the top band you have reached.
Does National Insurance count toward my marginal rate?
Yes, for earned income. The pound you earn next loses both income tax and National Insurance, so your true marginal rate is the sum of the two at that income level. Because employee National Insurance steps down on high earnings, the combined marginal rate does not rise evenly across all income.
Can my marginal rate be higher than the top published tax band?
Yes. Allowance withdrawals and benefit charges stack on top of the ordinary bands. The personal allowance taper, for instance, can push the effective marginal rate to around 60% in a specific income band, higher than the headline higher rate, even though your overall effective rate stays far lower.