Basics
Marginal vs effective tax rate
7 min read · Last updated 1 November 2026 · Tax Globy editorial team
Two numbers describe the same tax bill. The marginal rate is the rate charged on the next unit of income. The effective rate is total tax divided by gross income. They answer different questions, and using one where the other belongs is the most common reason an estimate looks wrong.
The rate on the next unit of income
The marginal rate is what you pay on one more unit of income: the next pound, rupee, dollar or yuan. In a progressive system it is set by the band that the next unit falls into, so it changes only when income crosses a threshold.
This is the rate to use when you weigh a raise, a bonus or an extra deduction. It describes the edge of the bill, not the middle of it. A marginal rate of 20% means that 20% of the next 1,000 of income goes in tax, and it says nothing about the tax already paid on the income below that point.
The rate on the whole amount
The effective rate is total tax divided by gross income. It describes the average burden across every slice, including any slice that is taxed at zero.
Because the effective rate mixes all the bands together, it is a better figure for comparing two salaries, two years or two countries. It is a worse figure for deciding whether extra work is worth it, because it does not describe the next unit.
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 calculatorPakistan: PKR 3,000,000
Take a salary of PKR 3,000,000 in tax year 2026-27 with no other income. The first 600,000 is taxed at 0%, the next 600,000 at 1%, the next 1,000,000 at 11% and the final 800,000 at 20%.
The tax is PKR 276,000. The marginal rate is 20%, because the last rupee of salary sits in the 20% band. The effective rate is 9.2%, because 276,000 is 9.2% of 3,000,000.
- Up to 600,000: 0%
- 600,001 to 1,200,000: 1%, which is 6,000
- 1,200,001 to 2,200,000: 11%, which is 110,000
- 2,200,001 to 3,200,000: 20% on 800,000, which is 160,000
United Kingdom: GBP 50,000
Take a salary of GBP 50,000 in 2026-27 in England, Wales or Northern Ireland. The personal allowance of 12,570 is free of tax, leaving 37,430 taxable, and all of that falls inside the 20% band.
Income tax is GBP 7,486. The marginal rate is 20% and the effective rate is 14.97%, measured before National Insurance. National Insurance is a separate charge and is not part of either figure.
Why the effective rate is always lower
The effective rate sits below the marginal rate whenever the system is progressive, because some income is taxed at lower rates or not at all. In both examples above, a slice taxed at zero pulls the average down.
Only a single flat rate makes the two numbers equal. The wider the zero band and the more bands below the top one, the larger the gap between them. That gap is a feature of the design, not an error in the arithmetic.
| Country | Gross | Tax | Effective | Marginal |
|---|---|---|---|---|
| Pakistan | PKR 3,000,000 | PKR 276,000 | 9.2% | 20% |
| United Kingdom | GBP 50,000 | GBP 7,486 | 14.97% | 20% |
Why a pay rise never reduces take-home pay
Extra income is taxed at the rate of the band it lands in, while the income below it keeps its original treatment. A raise can therefore lift the marginal rate without ever lowering the amount that reaches the bank account.
This holds for income tax in a straightforward progressive system. Withdrawal of means-tested benefits or allowances can behave differently, and those effects are usually shown separately from income tax.
Figures are estimates for general guidance, not tax advice.
What each number is for
Use the marginal rate for decisions: whether to take on extra hours, how much a pension contribution saves, whether a deduction is worth the effort. It answers the question about the next unit.
Use the effective rate for comparisons: two job offers, two countries, or the same salary in two tax years. It answers the question about the whole bill. Quoting the right one is most of the way to a correct conclusion.
Common questions
Is the effective rate the same as the average rate?
Yes, in ordinary usage. Both mean total tax divided by gross income, and both describe the whole bill rather than the next unit.
Can my marginal rate be higher than my effective rate?
It usually is in a progressive system. A single flat rate is the case where the two numbers coincide.
Which rate should I use to judge a pay rise?
The marginal rate, because it describes the tax on the extra income. The effective rate will rise more slowly than the marginal rate as income grows.
Why does the UK example exclude National Insurance?
National Insurance is a separate charge with its own thresholds and rates. The 14.97% figure is income tax only, as stated.
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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