Guides · Phase-outs and tapers

When a raise does not help

A raise can lower your take-home pay. The interaction of marginal income tax, social contributions, and phase-outs of personal allowances and credits produces effective marginal rates that are often much higher than the headline top rate. In the worst stretches, every extra pound or dollar you earn keeps less than 40p (or 40¢) — sometimes nothing at all.

How the marginal rate becomes effective

The marginal vs effective guide sets up the basic idea: the rate on your last dollar is your marginal rate, and the rate on your average dollar is your effective rate. A raise only changes take-home at the marginal rate — but the effective rate is what people compare across jobs, raises, and countries.

What makes it worse: the marginal rate on the next dollar can be higher than the top bracket. Three things stack:

  1. The top marginal income-tax rate (40% in the UK, 37% in the US).
  2. Social contributions on top (2% UK NI above £50,270, 2.35% total US payroll above Social Security wage base and 2.35% Medicare above $200k for single filers).
  3. Phase-outs and tapers that withdraw personal allowances or credits as income rises, on top of the regular tax.

Add them up and the marginal rate on the next dollar can reach 60% or more in some ranges. Some phases of income can even have a negative or zero marginal return (where a raise actually loses money).

The UK £100,000 Personal Allowance taper

The most cited example in UK personal finance. The full £12,570 Personal Allowance is available until adjusted net income reaches £100,000. Above £100,000, the allowance is withdrawn at £1 for every £2 of income — so by £125,140, the Personal Allowance is £0.

That withdrawal looks like income tax, so the effective marginal income-tax rate in the £100,000-£125,140 band is not 40% — it is 60%. You pay the 40% higher-rate on the income itself, and an additional 20% in withdrawn Personal Allowance (because the £12,570 × 20% basic rate is now due). Plus 2% NI above £50,270, which gives a combined marginal rate of 62%.

That's the famous "60% tax trap." It is real, it is statutory, and it bites around the £100,000 mark — which is exactly the income range where a £10,000 raise can lose a meaningful chunk of net value.

Worked example: £99,000 → £101,000

A worker earning £99,000 gross who negotiates a £2,000 raise to £101,000 sees what happen to their take-home? Let's run it.

UK take-home: £99,000 vs £101,000, single, E/W/NI, 2026/27
Item At £99,000 At £101,000 Difference
Gross £99,000 £101,000 +£2,000
Adjusted net income £99,000 £101,000 +£2,000
Personal Allowance (with taper) £11,320 £10,070 −£1,250
Taxable income £87,680 £90,930 +£3,250
Income tax (basic + higher) £25,254 £26,454 +£1,200
Employee NI (8% to £50,270, 2% above) £5,673 £5,713 +£40
Take-home (cash) £68,073 £68,833 +£760
Effective marginal rate 62% — £760 of every £1,000 raise

A £2,000 gross raise yields £760 of take-home. The 62% marginal rate is real and visible on a payslip. The strategy advice ("don't pass £100k unless the raise is large") comes from this math — sacrificing £3,000 into a workplace pension to drop adjusted net income below £100,000 can save £720 of tax on the next year's bill.

Note: TaxMetria's UK calculator does not model this taper in v1. The example above is illustrative math, not a calculator feature. See assumptions for the full exclusion list.

US Additional Medicare Tax

On the US side, the most familiar stacking effect is the Additional Medicare Tax. Regular Medicare is 1.45% on all wages. Above $200,000 of wages for a single filer, an extra 0.9% applies — and the employer must withhold it on wages above the threshold even if the year-end total lands below it. The two together give 2.35% Medicare in that band.

That is not yet a "trap," but it does stack with the federal bracket (35% above $250,525 for 2026 single, 32% above $103,350). The combined marginal rate for a single filer earning $250,525-$260,400 in 2026 is 32% federal + 2.35% Medicare = 34.35%.

US Social Security wage base

Social Security tax (6.2% employee) is capped at the wage base — $184,500 for 2026, up from $176,100 in 2025. Above the cap, the 6.2% disappears. That is good news for high earners — the marginal rate on income above the cap is 6.2 percentage points lower than the marginal rate below it.

But the bracket structure above the cap still applies. A single filer earning $200,000 in 2026 sees:

  • 24% federal bracket (income $103,350 to $205,050)
  • No Social Security above the wage base
  • 1.45% Medicare on all wages (no cap)
  • Possibly 0.9% Additional Medicare if the $200,000 threshold has been crossed in a prior job — typically withheld via Form W-4 step 2 checkbox.

Combined marginal rate in that band: 24% + 1.45% = 25.45% (or 26.35% with Additional Medicare). Modest by global standards, but well above the effective rate.

US credit and deduction phase-outs

US tax law has many phase-outs that stack on top of the brackets. The most material:

  • IRAs — the deduction for traditional IRA contributions phases out at higher incomes for people covered by a workplace retirement plan. Above the phase-out, no deduction is available.
  • Roth IRA contributions — phased out entirely for high earners (currently $150,000-$165,000 single in 2026, per the IRS, though these figures are adjusted annually).
  • Child Tax Credit — $2,000 per qualifying child, phased out at $50/1000 of MAGI above $400,000 for married filing jointly (a much higher threshold for singles).
  • Student loan interest deduction — phased out at higher incomes.
  • Medical expense deduction — only the amount exceeding 7.5% of AGI is deductible. Below that floor, the deduction is zero.

Each phase-out is a narrow income band where the marginal effect is large. The Child Tax Credit phase-out, for example, is a 50% marginal rate in some ranges: every extra $100 of MAGI costs $50 of credit.

Practical lessons

  1. Look at effective marginal rates, not headlines. The "40% higher-rate" UK band can be 62% marginal because of the Personal Allowance taper. The "37% top" US band is rarely 37% marginal because state tax (not modeled here) often stacks on top.
  2. Pension / 401(k) contributions smooth phase-outs. Salary-sacrifice pension contributions in the UK lower adjusted net income, which keeps the Personal Allowance intact. 401(k) contributions in the US lower AGI, which keeps more credits and deductions in play.
  3. Run the calculator before negotiating. The TaxMetria calculator is the clean baseline — pre-tax deductions and credits not modeled. Use it to see what a raise at a given income looks like before the add-ons.
  4. Avoid the cliff edges. The £100,000 mark in the UK and the $200,000 / $250,000 marks in the US are marginal-rate cliffs. If you can land $1 below them via a pre-tax deduction, the savings can dwarf the deduction cost.
  5. Year-end timing matters. A bonus paid in December vs January can change which bracket it lands in. UK pension contributions made by 5 April count for the year; US 401(k) contributions up to the April tax filing deadline count for the prior year if you have a Solo 401(k) or can use employer-side true-up.