Tax rates
Effective Tax Rate vs Marginal Tax Rate
People often mix up effective tax rate and marginal tax rate. This page shows the difference in plain English with one simple bracket example so you can read estimates and take home pay more confidently.
Published: December 31, 2025 · Updated: December 31, 2025 · By FinToolSuite Editorial
Disclaimer
- Educational purposes only, not financial or tax advice.
- Examples are illustrative and simplified.
- Results depend on your inputs and assumptions and are not guaranteed.
- Real tax systems include allowances, credits, and local rules that are not covered here.
- See the Privacy Policy for handling details.
Open the salary after tax calculator
Estimate net pay, see an effective tax rate estimate, and compare scenarios.
Quick answers: effective tax rate vs marginal tax rate
- Marginal rate is the rate on the next slice of income.
- Effective rate is your overall average tax rate.
- In a bracket system, not all income is taxed at the top rate.
- Use both rates to understand take home pay changes.
Definitions: effective tax rate vs marginal tax rate
| Term | Plain meaning | Quick formula |
|---|---|---|
| Effective tax rate | Average tax rate across all income. | Total tax ÷ gross income. |
| Marginal tax rate | Rate on the next slice of income in your bracket. | Bracket rate on the next amount. |
Simple bracket example
Illustrative two-bracket model:
| Bracket | Income slice | Rate | Tax |
|---|---|---|---|
| 1 | $0 to $40,000 | 10% | $4,000 |
| 2 | $40,001 to $80,000 | 20% | $8,000 (on the $40,000 in this slice) |
- Total income: $80,000. Total tax: $12,000.
- Effective tax rate: $12,000 ÷ $80,000 = 15%.
- Marginal tax rate: 20% (applies to the next dollar above $40,000 in this model).
Why both rates matter
Marginal tax rate shows why a raise does not land dollar for dollar—only the new slice is taxed at the higher rate. Effective tax rate helps you compare overall burden across countries or scenarios. A $5,000 raise in the example would add $1,000 tax at the 20% marginal rate, leaving $4,000 extra take home, while the effective rate would move only slightly.
Common misconceptions
- All income is taxed at the top rate.
- Effective and marginal rates are the same.
- Crossing a bracket always lowers take home.
- Net pay changes are only tax, not deductions like pension.
- Comparing countries without noting model limits and local rules.
- Treating calculator results as a payslip.
How to see both in the calculator
The salary after tax calculator shows a simplified net pay and an effective tax rate estimate. It does not list every bracket slice but helps you compare scenarios. Use it to see direction, not exact payslip amounts.
Run your numbers here: salary after tax calculator.
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FAQs
Is effective tax rate the same as average tax rate?
Yes. It is total tax divided by gross income.
What is marginal tax rate in simple terms?
The rate on the next slice of income in your current bracket.
Does moving into a higher bracket tax all my income?
No. Only the income in that bracket is taxed at that rate; lower slices keep their rates.
Why does my take home increase less than my raise?
Because the raise portion can be taxed at a higher marginal rate, so net rises but not dollar for dollar.
Does the calculator show both rates?
It shows an effective tax rate estimate and net pay in a simplified model.
Where can I learn brackets quickly?
See how tax brackets work for a short explainer.
Can I see more salary FAQs?
Visit the salary after tax FAQ.
Is this tax advice?
No. This is educational and simplified.
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