Tax brackets
How Tax Brackets Work
Tax brackets look scary, but they are just a way to tax income in slices. This simple explainer shows how tax brackets work, why a higher bracket does not tax all income at that rate, and how marginal and effective rates relate.
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 not covered here.
- See the Privacy Policy for handling details.
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Estimate net pay, see your effective rate estimate, and compare scenarios.
Quick answers: how tax brackets work
- Brackets tax income in slices.
- Only the top slice is taxed at the top rate.
- Your marginal rate is the rate on the next slice.
- Your effective rate is the average across all income.
Tax brackets in plain English
Each bracket has a threshold. Income up to that threshold is a slice taxed at that bracket’s rate. When income passes a threshold, only the extra part goes into the next slice at the higher rate.
Worked example with bracket table
Illustrative two-bracket model:
| Slice | Tax rate | Taxed amount | Tax due |
|---|---|---|---|
| $0 to $40,000 | 10% | $40,000 | $4,000 |
| $40,001 to $80,000 | 20% | $40,000 | $8,000 |
- Total tax: $12,000 on $80,000 income.
- Effective tax rate: $12,000 ÷ $80,000 = 15%.
- Marginal tax rate: 20% on the next dollar above $40,000 in this model.
Illustrative only; real systems include more brackets and rules.
What happens when you cross a bracket
If income rises from $80,000 to $81,000 in this model, only the extra $1,000 is taxed at 20%. The first $80,000 keeps its earlier treatment. Take home still rises.
Brackets, marginal, and effective rates
Marginal rate is the rate on your next slice. Effective rate is your average across all slices. Both come from the bracket structure. See effective vs marginal tax rate to go deeper.
Common misconceptions
- All income is taxed at the top rate.
- Crossing a bracket lowers take home pay.
- Marginal rate equals effective rate.
- Net pay is gross minus one rate.
- Bonuses are always taxed more (withholding can differ; final tax follows brackets).
- Calculator equals payslip.
- Ignoring pension percent effects on taxable base.
- Ignoring local taxes and credits.
How the calculator uses brackets
The salary after tax calculator uses a simplified national bracket model without every allowance or local tax. Results can differ from payslips. See the limitations and assumptions for details.
Run your own numbers: salary after tax calculator.
Safe handling and privacy
- Keep scenario labels generic.
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FAQs
Does moving into a higher bracket tax all my income?
No. Only the income in the higher slice is taxed at that rate.
What is a tax bracket threshold?
The income level where one bracket ends and the next begins.
What is my marginal rate?
The rate on the next dollar or unit of income in your current bracket.
What is my effective rate?
Total tax divided by total income.
Why do estimates differ from payslips?
Payslips include allowances, credits, local taxes, and timing not in simplified models.
Does the calculator include local taxes?
No. It uses a simplified national model without all local rules.
Where can I see more FAQs?
Visit the salary after tax FAQ.
Is this tax advice?
No. This is educational and simplified.
Run your own numbers
Estimate net pay, see effective rate, and compare scenarios quickly.