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Marginal tax rate

(16 Posts)
Wishihadabs Fri 29-Mar-13 16:18:48

On another tread a poster mentioned a marginal tax rate. The context was a earner between 50-60K with 3 children having a marginal tax rate of 68% can someone explain this please. (That thread is closed)

ChasingSquirrels Fri 29-Mar-13 16:22:45

Tax, NI & withdrawal of child benefit

ChasingSquirrels Fri 29-Mar-13 16:23:54

At one point, when receiving tax credits, I had about effective tax rate of (iirc) 82%

pompompom Fri 29-Mar-13 16:33:12

Does it include VAT as well?

ChasingSquirrels Fri 29-Mar-13 16:36:09

No, not VAT, just direct taxes and withdrawal of benefits.
There is another peak over 100k when the personal allowance is withdrawn.

pompompom Fri 29-Mar-13 16:59:09

But surely the higher tax is only paid on the higher earnings. You're not paying that much on your whole salary. (talking normal HRT payers)

pompompom Fri 29-Mar-13 17:00:35

And don't you stop paying the full NI once you earn over £50k, or have I imagined that?

ChasingSquirrels Fri 29-Mar-13 17:17:17

The marginal rate is the amount you pay in tax / benefit withdrawal/repayment on each additional pound - it is not your overall tax rate.

pompompom Fri 29-Mar-13 17:38:51

Can you explain how that might be worked out on an income of, say £50k? Not understanding so far. Sorry if I'm being dim, but can't work it out.

ChasingSquirrels Fri 29-Mar-13 17:59:38
pompompom Fri 29-Mar-13 18:13:15

Thanks

Wishihadabs Fri 29-Mar-13 18:18:54

Thank you that makes it much clearer

MrAnchovy Sat 30-Mar-13 15:12:18

"Can you explain how that might be worked out on an income of, say £50k?"

So for someone on £50k with 3 children eligible for child benefit:

Income tax 40%
National Insurance 2%
Total child benefit PA £2,456, pay back 1% for every £100 income so 24.56%

Total marginal rate 66.6%; 68% looks like a slight overstatement.

pompompom Sat 30-Mar-13 16:28:03

I still don't get it tbh.. you don't pay 40% on the whole 50k. Am I being really thick? blush

MrAnchovy Sat 30-Mar-13 17:43:05

No you don't, but there is another name for the rate you pay overall (i.e. your total tax divided by your total taxable income) which is the "average rate".

The "marginal rate" is the rate that applies to marginal income i.e. the amount of tax taken from (or the amount by which benefits are reduced for) the next pound that you earn. They are an important measure because (i) high marginal rates can be indicative of a poorly designed system and (ii) they can be a disincentive to work - clearly as the marginal rate approaches 100% (and for certain benefit combinations it can actually exceed 100%) where every additional £ you earn is lost in taxation/withdrawal of benefits.

pompompom Sat 30-Mar-13 17:59:49

Oooohhh ok. Thank you, I get it now.

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