Moving into a higher tax bracket only raises the rate on the part of your income above that bracket’s threshold — not on everything you earn. Enter your income and your tax brackets (from your tax authority’s website) to see exactly how it works out.
Example brackets below — replace them with your own country’s current ones.
| Slice of income | Rate | Amount | Tax |
|---|
Most income tax systems are progressive: income is cut into slices, and each slice is taxed at its own rate. With the example brackets (10% up to 20,000, 20% to 50,000, 30% to 100,000 and 40% above), an income of 75,000 pays 10% × 20,000 + 20% × 30,000 + 30% × 25,000 = 2,000 + 6,000 + 7,500 = 15,500.
Your effective rate is total tax ÷ income: 15,500 ÷ 75,000 = 20.7%. Your marginal rate is the rate on the next dollar you earn: 30% here. A raise of 5,000 costs 1,500 in extra tax, so you keep 3,500 of it.
That’s why a raise that pushes you into a higher bracket never leaves you worse off (unless means-tested benefits or credits are withdrawn): only the new income above the threshold is taxed at the higher rate.
The rate you pay on your next dollar of income — the rate of the highest bracket your income reaches. It’s what matters when deciding whether extra work, a raise or a bonus is worth it.
Your total tax divided by your total income: the average rate across all your income. It’s always lower than your marginal rate in a progressive system, because lower slices are taxed at lower rates.
No. Only the part of your income above the threshold is taxed at the higher rate, so you always keep some of every extra dollar. The exception is where benefits or credits are reduced as income rises, which can create very high effective marginal rates.
Your tax authority publishes them — for example IRD (New Zealand), ATO (Australia), HMRC (UK) or IRS (US). They often change on 1 April, 1 July or 1 January, so check they’re for the current tax year.
Payslips also include things like levies, social security, retirement contributions, student loan repayments, tax credits and allowances, and payroll spreads tax evenly across the year. Enter only the income tax brackets here to see that part on its own.
