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Marginal Rate of Tax

Marginal Rate of Tax

Dear All,

I am trying to get my head around marginal rate tax without much success.

Can someone, as succintly as possible, explain to me why the marginal rate of tax (32.5%) is higher than the full rate (30%) and how that comes to pass?

Isn't it a "mix" of small companies and full rate? So how does it become a higher rate than full rate.

Apologies if this is a stupid question, but I just cannot process it.

I look forward to a response,


chantelle x


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By Anonymous
14th Apr 2010 12:45

It's all in averages

Up to the lower limit you pay 21% and above the upper limit you pay 28%.  In between you need to have a rate that draws the average further towards 28% the higher you go.  That figure, necessarily has to be higher than 28% (or it could never get to an average rate of 28%, with the first £300K only taxed at 21%).

ie: £300,000 @ 21.00% + £1,200,000 @ 29.75% = £1,500,000 @ 28.00%

oxon x

Above edited because in my original post I (stupidly) still had the full rate in "old money", which I think would confuse given subsequent posts.

In old money, the above would be: £300,000 @20.00% + £1,200,00 @ 32.50% = £1,500,000 @ 30.00%.

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14th Apr 2010 17:16

How I was taught

Many years ago it was explained to me with an example such as this:

Assume profits of £300,000 which would all be taxed at 21% =  £63,000 Corporation Tax

Now assume profits of £301,000 which would be taxed as follows:

                                          301,000 x 28% =                84,280.00

less marginal relief (1,500,000 - 301,000)  x 7/400 =  (20,982.50)

Therefore tax due on profits of £301,000 is 84,280 - 20,982.50 = £63,297.50

Effectively that £1,000 extra profit (in the marginal band) will suffer tax of 63297.50 - 63000 = 297.50 which is 29.75%(as will every pound in this band) - this is the effective marginal rate on profits in this band (for 2009+).

You could substitute the percentages in your original example and using the same method you would arrive at a marginal rate of 32.5% but the percentages (and marginal rate fraction) you mention are three years out of date now...                             




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By Anonymous
14th Apr 2010 17:23

Or even mathematically....

Using Oxons logic you can create a formula for working it out:

Marginal Rate = (5 times higher rate less 1 times lower rate ) / 4

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By Pahl
23rd Feb 2011 20:22

Corporation Tax marginal rates continued...

I can understand the example you have given but it still seems to defy logic that the marginal rate between the higher and lower rates of corporation tax should be the highest!  Can anyone explain this to me in a really simple manner?!

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By Old Greying Accountant
24th Jun 2011 09:35

Stamp duty is an easier example

On a property of £250,000, the stamp duty is 1% = £2,500

On a property of £250,001, the stamp duty is 3% = £7500.03

The extra £1 has incurred £5000.03 extra tax, so the marginal rate is 500,000.03%

Same principal for CT, that extra £1 incurs extra tax on all the profits up to that amount, which is why the marginal rate is larger than the highest rate.


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