Marginal vs Effective Tax Rate: What Really Happens When You Get a Raise

"I turned down overtime because it would push me into a higher bracket." People say this every day, and in nearly every case they are leaving money on the table. In a progressive income tax system, a raise increases your take-home pay. To see why — and to understand the rare situations where extra income really can cost more than expected — you need two numbers: your marginal tax rate and your effective tax rate.

The two rates in one sentence each

Your marginal tax rate is the rate charged on your next unit of income. Your effective tax rate is your total tax divided by your total income. The marginal rate is always equal to or higher than the effective rate in a simple progressive system, because lower slices of income are taxed at lower rates.

A worked example: crossing a bracket

Take a hypothetical system — not any real country — where the first $10,000 is taxed at 0%, the next $30,000 at 20%, and everything above $40,000 at 35%. Someone with $40,000 of taxable income pays nothing on the first $10,000 and $6,000 on the next $30,000. Total tax: $6,000. Effective rate: 15%.

They are offered a $5,000 raise. That raise takes them into the 35% band. Here is what changes:

The additional tax is $1,750, which is 35% of the $5,000 raise. Take-home income rises by $3,250. The $40,000 they were already earning is taxed exactly as before. Only the new $5,000 meets the higher rate.

Try it: the raise simulator

Enter your own income and a possible raise or bonus. The simulator shows the tax before and after, the additional tax, the increase in take-home income, the effective rate before and after, and the average rate on the extra income. You can switch between the illustrative system, the 2026 US federal brackets for a single filer, and the 2026/27 UK bands.

If your raise stays within one bracket, the rate on the extra income equals your marginal rate. If it straddles a threshold, the rate on the extra income is a blend of the two bands — which the simulator shows as the average rate on the raise.

Bracket by bracket: a real-system example

Using the IRS figures for tax year 2026, consider a single filer with $90,000 in wages and only the $16,100 standard deduction. Taxable income is $73,900. The first $12,400 is taxed at 10% ($1,240), the next $38,000 (up to $50,400) at 12% ($4,560), and the final $23,500 at 22% ($5,170). Federal income tax is $10,970, an effective rate of about 12.2% on gross wages, while the marginal federal rate is 22%.

A $5,000 raise to $95,000 stays inside the 22% band, so federal income tax rises by $1,100. The employee keeps $3,900 of the raise before payroll taxes. Adding the 7.65% employee share of Social Security and Medicare, the combined marginal rate on that raise is about 29.65%, so roughly $3,518 of the $5,000 reaches their pocket before any state tax.

When the marginal rate is not the whole story

The simple bracket model covers most people, but three things can push the real cost of extra income above the headline marginal rate.

1. Social contributions stack on top

Payroll taxes and social insurance contributions are usually charged separately from income tax, and they have their own thresholds. In the UK, an employee in the basic-rate band pays 20% Income Tax plus 8% National Insurance on each extra pound, a combined 28%. Above £50,270, the rates become 40% and 2%, a combined 42%. Looking at income tax alone understates the true marginal cost.

2. Allowance tapers

Some allowances shrink as income rises. In the UK, the £12,570 Personal Allowance falls by £1 for every £2 of adjusted net income above £100,000 and disappears completely at £125,140. In that range, every extra £2 earned is taxed at 40% and also removes £1 of allowance, which is then taxed at 40% too. The effective marginal Income Tax rate between £100,000 and £125,140 is therefore 60% — before National Insurance. Pension contributions are one common, legitimate way people reduce income in this band.

3. Means-tested benefits and phase-outs

Benefits, credits and subsidies that shrink as income rises act like a hidden extra tax. If a household loses part of a benefit for every unit of extra income, the combined effect of income tax, social contributions and the benefit withdrawal can be very high. In extreme cases — sometimes called a benefit "cliff" — a benefit stops entirely at a set income, and a small raise can genuinely reduce total household resources. These cases are real but specific, so check the rules of each benefit you receive before declining work.

Using each rate correctly

• Deciding whether to take extra hours, a bonus or a side project: use your combined marginal rate (income tax plus contributions plus any benefit withdrawal).
• Valuing a deduction or pension contribution: use your marginal rate, because the deduction removes income from your top band.
• Building a budget or comparing your tax to other countries: use your effective rate on gross income.
• Comparing two job offers: calculate take-home pay for each, rather than comparing headline brackets.

A quick test for any raise

1. Find the band your current taxable income falls in.
2. Check whether the raise crosses a threshold; if so, split it into the part below and the part above.
3. Multiply each part by its rate, and add any social contribution rate that applies.
4. Check for allowance tapers or benefit withdrawals in your income range.
5. Subtract the total from the raise. That is what you actually keep.

Frequently misunderstood points

Does a higher bracket ever reduce take-home pay? Not from income tax brackets alone. Only tapers, cliffs or benefit rules can produce that result, and they are exceptions.

Is withholding the same as tax owed? No. Bonuses are sometimes withheld at a flat rate that differs from your marginal rate, and the difference is settled when your final tax is calculated for the year.

Why does my effective rate rise after a raise? Because a bigger share of your income now sits in higher bands. It rises slowly, and always stays below your marginal rate in a simple system.

The bottom line

A raise is taxed at your marginal rate, not your whole salary. In a normal progressive system, earning more always means keeping more. Know your marginal rate to judge extra income, your effective rate to plan your budget, and check for contributions, tapers and benefit rules that apply in your income range. For everyday estimates, our Salary Calculator converts annual pay into take-home figures, and the Tax Calculator gives a quick single-rate check.