Tax brackets (or income tax bands) determine how much tax you pay on different portions of your income. A common misconception is that moving into a higher bracket taxes all your income at the higher rate — it does not.
How Tax Brackets Work: The Marginal Rate System
Only the income within each band is taxed at that band's rate. Lower income bands always apply first.
UK Income Tax Bands (2025/26)
| Band | Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571–£50,270 | 20% |
| Higher rate | £50,271–£125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Note: Personal allowance reduces by £1 for every £2 earned over £100,000.
Worked Example: UK Income of £60,000
| Band | Income in band | Tax rate | Tax |
|---|---|---|---|
| Personal Allowance | £12,570 | 0% | £0 |
| Basic rate | £37,700 | 20% | £7,540 |
| Higher rate | £9,730 | 40% | £3,892 |
| Total tax | £11,432 |
Marginal rate: 40% (the rate on the last pound earned)
Effective rate: £11,432 ÷ £60,000 = 19.1% (average rate on all income)
US Federal Tax Brackets (2025, Single Filer)
| Rate | Income range |
|---|---|
| 10% | Up to $11,925 |
| 12% | $11,926–$48,475 |
| 22% | $48,476–$103,350 |
| 24% | $103,351–$197,300 |
| 32% | $197,301–$250,525 |
| 35% | $250,526–$626,350 |
| 37% | Over $626,350 |
Plus: Standard deduction ($15,000 in 2025) reduces taxable income.
Marginal Rate vs Effective Rate
| Measure | Definition | Useful for |
|---|---|---|
| Marginal rate | Tax on the next £1 earned | Deciding whether to earn more |
| Effective rate | Total tax ÷ total income | Comparing overall tax burden |
| Average rate | Same as effective rate | Cross-country comparisons |
The Pay Rise Trap (It's a Myth)
Moving into a higher tax bracket never makes you worse off. Only the additional income above the threshold is taxed at the higher rate.
Example: You earn £50,000 and get a £1,000 raise:
- First £270 of the raise is taxed at 20% (up to the £50,270 threshold)
- Remaining £730 is taxed at 40%
You still take home more money than before.
Allowances That Reduce Your Tax Bill
- Personal Allowance: £12,570 tax-free
- Marriage Allowance: Transfer £1,260 of unused allowance to spouse
- Pension contributions: Reduce taxable income at your marginal rate
- Gift Aid: Charity donations are grossed up for basic rate taxpayers
- ISA interest/dividends: Tax-free investment returns