Marginal income tax - it doesn’t need to give you brain freeze

We hear a lot about ‘basic rate tax payers’ and ‘tax on higher earners’ but how much about this do we really know? In the UK Income Tax currently has 4 bands, so your income between;

- £0-£12,570 is not taxed - Personal allowance

- £12,571-£50,270 is taxed at 20% - Basic rate tax band

- £50,271-£150,000 is taxed at 40% - Higher rate tax band

- Over £150,000 is taxed at 50% - Additional rate tax band

It’s important to realise that this doesn’t mean if you earn £60,000 a year the whole lot gets taxed at 40%, it’s only the margin OR the amount in that band.

Here’s a couple handy examples:

Example 1

Mr. Yeti (no relation) earns £30,000 in his job as a snowball salesman. To calculate the tax he should expect we look at it as follows:

- £0-£12,570 is not taxed

- £12,571-£30,000 is taxed at 20%

That means £17,430 is taxed at 20% - that’s £3,486 he’ll pay in tax over the year and the rest he’ll take home!

Example 2

Dr. Frost earns £45,000 as a GP in the Himalayas. She does such a great job that she gets a pay bump of £10,000 to £55,000. To calculate the tax he should expect we look at it as follows:

- £0-£12,570 is not taxed

- £12,571-£50,000 is taxed at 20%

-£50,000-£55,000 is taxed at 40%

That means £37,430 is taxed at 20% - that’s £7,486. Also, the £5,000 she earns in the higher income tax band will be taxed at 40% - that’s £2,000. So she ends up paying £9,486 in tax over both bands in the whole year, and the rest she’ll take home!

It might seem straight forward but it’s important to note that not your whole salary is taxed at the rate in the higher bands so a pay rise is always good. These are two pretty straight forward examples, but remember interest on savings, capital gains from selling valuable assets, dividends from investments - these all impact which band you’re in and how much tax you pay in each. If you need any help working out where you’re at, or need someone to help file your self assessment drop us a message on the contact page or a DM on any of our socials.