Basics
How income tax is calculated
5 min read · Last updated 1 November 2026 · Tax Globy editorial team
Income tax is charged on a definition of income that is narrower than your salary, and at rates that apply in slices rather than to the whole amount. Separating gross income from taxable income, and the marginal rate from the effective rate, explains most of the confusion.
Gross income, taxable income and the tax bill
Gross income is the total your employer or payer reports before anything is taken out. Taxable income is the part the tax system actually charges, after allowances, deductions and other reliefs the law recognises. The tax bill is worked out from taxable income, not from gross income.
The distinction matters because salaries are usually compared as gross figures. Two employees on the same gross salary can have different taxable incomes and very different tax bills without either payslip being wrong. Think of a sequence: gross income, then allowed deductions, then bands, then credits.
Why bands only tax the slice inside them
A progressive system splits taxable income into slices. Each slice has its own rate, and that rate applies only to the income inside that slice. The first slice is usually taxed at a low rate or not at all, and later slices carry higher rates.
This is the detail people miss when they say a raise could leave them worse off. In a straightforward progressive system it cannot, because the higher rate applies to the extra income only, while income below the boundary keeps its original treatment. The table shows the shape of such a system; the figures are illustrative and describe no real country.
| Slice of taxable income | Rate applied to that slice |
|---|---|
| First 20,000 | 10% |
| Next 30,000 | 20% |
| Above 50,000 | 30% |
Run your own numbers
The calculator applies the rates described in this guide and shows the band-by-band breakdown.
Open the all five calculators calculatorA small worked example
Suppose taxable income is 40,000 under the illustrative bands above. The first 20,000 is taxed at 10%, giving 2,000. The next 20,000 sits inside the 20% band, giving 4,000. No income reaches the 30% band, so that rate plays no part.
Total tax is 6,000. The highest rate touched is 20%, and the average rate is 15%, because 6,000 is 15% of 40,000. Neither figure is wrong: one describes the edge of the bill and the other describes the whole of it.
Marginal rate and effective rate
The marginal rate is the rate charged on the next unit of income. It is the number to use when you ask what a raise, a bonus or an extra deduction is worth. The effective rate is total tax divided by total income, so it describes the overall burden rather than the edge.
A person can have a marginal rate of 30% and an effective rate of 18%, and both statements can be true at once. Confusing the two is the most common reason an estimate looks wrong when it is actually correct. Use the marginal rate for decisions and the effective rate for comparisons.
Deductions and credits are not the same
A deduction reduces taxable income. Its value depends on your marginal rate, so in a 20% band a deduction of 1,000 reduces tax by at most 200. A credit reduces the bill itself, so a credit of 1,000 normally reduces tax by 1,000 whatever band you are in.
Some credits are refundable and can produce a payment even when no tax is due, while others can only take the bill down to zero. The order in which allowances, deductions and credits apply is set by law, and it can change the final amount. Compare the actual change in tax, not the size of the relief.
Why two people on the same salary pay different tax
Filing status, residence, family circumstances and age can all change the bands, allowances and credits that apply. A person filing jointly may face different thresholds from a single person, and a person living in a different region may pay a different rate on the same income.
Deductions explain much of the rest. Pension contributions, health insurance, childcare, education costs, charitable giving and home loan interest can each move taxable income or the bill. Timing matters too: a bonus paid in one year rather than the next changes the total even when lifetime earnings are identical.
- Filing status and where you live
- Deductions such as pension contributions or health insurance
- Credits for children, education or low income
- The year in which a bonus or other income is paid
This guide is general information, not tax advice; check the rules that apply to your own situation.
Common questions
Is my whole salary taxed at my top rate?
No. The top rate applies only to the slice above the last threshold. Lower income is taxed at lower rates, so the effective rate stays below the marginal rate.
Does a pay rise ever reduce my take-home pay?
In a straightforward progressive system, no, because only the extra income is taxed at the higher rate. Means-tested benefits can behave differently and are usually shown separately from income tax.
Why do two colleagues on the same salary pay different tax?
Filing status, residence, deductions, credits and bonus timing can all differ. Gross salary is only the starting point.
How accurate is an online estimate?
It is useful for planning but still an estimate. Payroll systems, final returns and reliefs claimed later can change the amount.
Written and maintained by the Tax Globy editorial team
Tax Globy is an independent calculator project. Every rate, threshold and deduction is checked against the published official source listed on the page, and each page shows when it was last reviewed.
Last reviewed 1 November 2026 · Estimates only, not tax advice.
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