# Marginal income tax rates explained

In the UK, we have a marginal tax rate system. This means income tax is charged on income above a certain level. It does not mean if you earn £200,000 you pay 50% on the whole £200,000. You only pay 50% on the income earned above £150,000 after the personal allowance is included.

## Income tax rates

2014-152015-16
Per cent of income / £ a year
Basic rate20%20%
Higher rate40%40%
Starting rate for savings income (*)10%0%
Dividend ordinary rate10%10%
Dividend upper rate32.5%32.5%
Trust rate45%45%
Starting rate limit (savings income)£2,880£5,000
Income tax threshold£10,000£10,600
Basic rate band£0 – 31,865£0 – 31,785
Higher rate band£31,866 – 150,000£31,786 – 150,000

## Income tax allowances

 2014-15 2015-16 Change £ a year Personal Allowance those born after 5 April 1948 10,000 10,600 600 those born between 6 April 1938 and 5 April 1948 10,500 10,600 100 those born before 6 April 1938 10,660 10,660 – Income limit for personal allowance (*1) 100,000 100,000 – Income limit for personal allowances (born before 6 April 1948) (*2) 27,000 27,700 700 Married couple’s allowance (*3) maximum amount (*4) 8,165 8,355 190 minimum amount (*5) 3,140 3,220 80 Blind person’s allowance 2,230 2,290 60 Transferable Tax Allowance for married couples and civil partners (*6) – 1,060 –

### Examples of Income Tax

• In 2014/15 the income tax threshold is £10,000

If you earn £11,000 in a year. The first £10,000 is tax free. Therefore, you pay income tax on the last £1,000. Therefore, the income tax payable on £1,000 @20% is £200. effectively you pay an average income tax of 1.8%.

If you earn £30,000.You will pay the basic rate on the marginal tax above the threshold £30,000-£10,000.

Your income tax will be 20% of £20,000 = £4,000 or an average tax rate of 13%.

If you earn £50,000. Your income tax will be:

• £50,000 – £6,475 (tax allowance) = £43,525 (taxable income)
• £43,525 – £37,400 (higher rate band) = 6,125 @ 40% = £2,450 (higher rate tax liability)
• £37,400 @ 20% = £7,480 (basic tax liability)

Total tax is £7,480 + £2,450 = £9,930 (19.8%)

more on income tax rates

National insurance N.I. Contributions

In addition to income tax rates, there are national insurance contributions (N.I.) levied on income earned.

Related

### 2 thoughts on “Marginal income tax rates explained”

1. Also, your tax allowance is reduce by £1 for every £2 you earn over £100,000.

So earning £112,950 will reduce your personal tax allowance to £0.