The marginal tax rate is the rate at which your highest amount of income is taxed.
It applies to the highest portion of your income within a progressive tax system.
In many countries, tax rates increase in “brackets” or “tiers” as income rises, meaning higher levels of income are taxed at higher rates.
For instance, if you move from one income bracket to the next, only the income in the higher bracket is subject to the higher tax rate, not your entire income.
Understanding your marginal tax rate is essential because it affects how much any additional income you earn will be taxed.
Knowing this can help you plan for the impact of bonuses, raises, and other income sources, as they may push you into a higher tax bracket and increase your tax rate on that added income.
By being aware of your marginal tax rate, you can better evaluate potential earnings, strategise around deductions, and consider tax-saving moves like retirement contributions.
Marginal tax rates differ by country and often by income type, so if you move around a lot, make sure to check-in with the local tax framework!