Marginal tax rate

The marginal tax rate is the percentage that shows how much tax you’ll pay on an extra £1 of income earned. For example, the marginal tax rate might be 40% for someone who earns £60,000 a year, as every extra pound costs 40p in Income Tax.

The amount of Income Tax you’ll owe in a given tax year depends on two factors:

1. Income that falls into your personal allowance (PA)
2. The amount of remaining income within each tax band

Marginal tax rates are important as they ensure that lower earners pay a reduced proportion of their income in taxes in comparison to higher earners.

What are the Income Tax rates and bands for 2024/25?

Your marginal tax rate is all based on your tax bracket, which can be:

• 0% if you earn under £12,570
• 20% if you earn between £12,571 and £50,270
• 40% if you earn between £50,271 and £125,140
• 45% on any earnings beyond this

Once your income reaches £125,140, you’ll start to lose your tax-free personal allowance.

Marginal tax rate example

Jasper is a self-employed artist who earns £55,000 per year. Because he’s in the higher tax bracket, he’ll pay two different types of marginal tax rates.

Jasper’s Personal Allowance is £12,570, so he doesn’t pay any Income Tax up to that threshold. However, he’ll be taxed 20% on £37,700 worth of his earnings, and then 40% on the remaining £4,730. 

Overall, Jasper will end up paying £9,032 in Income Tax.

Why are marginal tax rates important if you’re self-employed?

Knowing your marginal tax rate is important if you’re self-employed because you need to know how much extra tax you’ll pay if you start earning more money. Because sole traders and freelancers pay tax during Self Assessment, they have to calculate how much money they need to set aside each month for their annual tax bill. Knowing their marginal tax rate helps them to understand how much they’ll end up paying when they complete their tax return.