What is the marginal income tax rate once the lifetime allowance has been reached?

06 February 2023

Got a question?We'll put your question to our panel of helpful advisers

Question by Roy

What is the marginal income tax rate once the lifetime allowance has been reached?

Answered by Samantha Secomb

To answer the question of ‘what is marginal tax’, you first have to look at income tax. The amount of income tax owed in any given tax year depends on two primary factors:

  • The amount of income that falls into your personal allowance (PA)

  • The amount of remaining income within each tax band

For most people the PA is currently £12,570. You don’t have to pay any tax on this amount. From there, the percentage of tax paid on earnings for the next pound earned is referred to as the ‘marginal rate’ of tax.

The marginal tax rate is designed as part of a progressive tax structure - see table below. It ensures that lower earners pay a reduced proportion of their income in taxes in comparison to higher earners. Anyone earning less than £12,570 doesn’t owe any taxes, while earnings over £150,000 pay a marginal rate of 45%.

For example, if you earned exactly £150,000 during the last tax year, your marginal rate of tax would be 45% because if you earned one more pound, the tax rate is 45%. However, if you earned £149,999 your marginal tax rate would be 40% as one more pound would keep you in that same tax bracket.
As stated above, the marginal tax rate refers to the rate paid on the next pound of earnings. Another frequently used term is the ‘effective’ rate of tax. This refers to the concept that taxpayer earnings will be taxed further due to other allowances being removed when earnings increase. For example, the Child Benefit is one such allowance. When earnings reach a high enough threshold, the Child Benefit is withdrawn which effectively lowers income beyond the marginal rate.

There are further considerations that can increase marginal tax rate within the UK, with higher earnings incurring more than the 45% tax rate. When personal income reaches £100,000, your tax-free PA is withdrawn which adds up to an extra 20% tax on earnings between £100,000 and £123,000. With an extra 20% tax, your marginal tax rate on any income over £100,000 would be 60%.

Keep in mind these are simply illustrations, as tax rates change from year to year, for example the additional rate of tax is due to change from £150,000 to £125,140, the income level at which an individual will not have any Personal Allowance, because £1 of the Personal Allowance is withdrawn for every £2 of income above £100,000 from 6 April 2023.

I hope this helps and not too much as I wanted to cover all angles for you Roy.

Answered by

Samantha Secomb

Chartered Financial Planner, FPFS

On a mission to make unbiased financial advice relevant and accessible to women.