The marginal tax rate is the percentage of tax you pay on the next unit of income you earn. In a progressive system income is sliced into bands, and each band is taxed at its own rate, so your marginal rate is simply the rate that applies to your highest, or top, slice of earnings.
A common misunderstanding is that moving into a higher bracket taxes all of your income at that higher rate. In reality only the income above each threshold is taxed at the higher rate. This is why a pay rise never leaves you worse off overall, even though the extra amount is taxed more heavily.
Take a UK earner on 50,000 pounds. The first slice is tax-free, the next is taxed at 20% and income above roughly 50,270 would be taxed at 40%. Their marginal rate is 40%, but most of their income was taxed at 20% or nothing. That is why their effective tax rate is much lower than 40%.
- US federal bands run 10% to 37%.
- Italy runs 23% to 43%, France up to 45%, Germany up to 45% plus surcharge.
The marginal rate matters most for decisions at the margin, like extra work or pension contributions, and it applies only to your taxable income. Compare brackets with the compare taxes by country tool.