Income Tax Theories - Marginal and Average Tax Rates - Who pays how much?

The marginal rate of taxation is the rate that is paid on each additional pound earned. In the case of income tax, this will vary according to the band of taxation the person is in. For example a person earning £6,000 a year will only pay a 20% marginal rate on each extra pound they earn, but a person earning £60,000 will pay a 40% marginal tax rate.

The average rate of taxation, however, is the total amount of income tax a person has paid as a proportion of their total income. This will generally be very different from the marginal rate. For example, if someone has just earned enough to pay the top rate of tax - 40%, then their marginal rate is 40%. However, over most of their income they have paid much lower rates of tax. The first bit of income was tax-free (the personal allowance), the next bit was taxed at 20% and the bit after that at 23%. Their average rate of tax will therefore be much lower than their marginal rate. The more they then earn above the 40% threshold, the closer their average rate will get to their marginal rate.

It is the increasing average rate of taxation that makes income tax progressive.

For more detail on the tax rates and tax allowances, you may want to look at the explanation about income tax.