What is the Marginal Tax Rate?

One of the key discussions we have with our clients is “what is your marginal rate of tax?” as well as, of course, the absolute amount payable.  With this in mind, over the course of the next few articles, we have produced a Tax Rate Guide for 2025/26 to help you understand how your circumstances fit into the myriads of tax rates that exist in the UK.

Typically, the more you earn, the more tax you pay; this is what is known as a “progressive” tax system.  However, put simply, your marginal tax rate is the tax rate you pay every time your income increases by an extra pound, or on any capital gains that you realise. And in some cases, the jump can be staggering 

This is particularly so when the tax and benefits system start to interact. As a result, different taxes kick in at different income levels, while certain benefits are clawed back. These interactions sometimes create huge spikes in marginal tax rates for certain groups.

For example, child benefit is clawed back once one person in a household starts earning above £60,000 a year. This could result in a marginal tax rate of more than 58% on earnings above £60,000 – or even more in the case of families with more than one child.

Similarly, once someone earns more than £100,000 a year, their personal allowance – the amount on which they pay 0% income tax – starts to be clawed back. This creates a marginal tax rate of 60%.

Taking this into account, we have analysed taxpayers into four categories and considered the position of companies so you can more easily understand how your marginal tax rate affects your financial and taxation position.

I am self-employed:

The taxes relevant to an individual with self-employed or partnership profits are:

• Income tax on your business profits                                                                                           
• Class 2 and 4 National Insurance Contributions                                                                         
• Employer Class 1 and 1A National Insurance Contributions on employee remuneration         
• Value Added Tax (VAT)                                                                                                                
• Capital allowances                                                                                                                       

I am a property landlord:

The taxes relevant to an individual renting out or owning an investment property are:

• Income tax on rental profits                                                                                                        
• Capital gains tax (if selling property)                                                                                           
• Stamp duty (if buying property)                                                                                                  

I have investment or pension income:

The taxes relevant to an individual with investment or pension income are:

• Income tax on the sums paid to you with 0% savings and dividend allowances                       
• Capital gains tax (on disposal of investments)                                                                            

I am a company director and shareholder:

There are a number of ways you may receive income from your company, including salary, bonuses, dividends, benefits in kind, pension contributions and interest income.

The taxes most likely to apply are:

• Income tax on the sums paid to you including on employment benefits                                  
• Class 1 National Insurance Contributions on salary or bonuses                                                 
• Employer (company) pension contributions do not trigger a tax charge unless your pension allowances are exceeded                                                                           

The methods of profit extraction from the company will determine your tax bill. Please talk to us about the best mix for you.

What about the company?

The company will also pay taxes including:

• Corporation tax on the business profits                                                                                      
• Employer Class 1 and 1A National Insurance Contributions on employee remuneration         
• Value Added Tax (VAT)                                                                                                                
• Capital allowances                                                                                                                       

Whether it is better to run a business as a self-employed venture or through a company depends on a range of factors. Talk to us about what is the best structure for you.

My situation is different

Tax certainly affects different people in different ways! The above are just some common examples. The following tax tables cover most mainstream UK taxes applicable to most income types and so should answer your questions. Please talk to us about how they apply to you.

Over the course of the next few articles, we will take a closer look at all of the categories above and the applicable tax rates and allowances. However, if you would like to discuss your marginal rate of tax or other tax issues, please get in touch. 

This summary provides only an overview of several key UK taxation rates, allowances and reliefs as applicable to persons resident and permanently settled in the UK. It is not exhaustive and should not be relied upon to identify all taxes, reliefs or allowances that may apply and no action should be taken without consulting the detailed legislation or seeking professional advice.  Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this summary can be accepted by the authors or the firm.