Average and Marginal Tax Rates

Question 1

You can calculate Average and Marginal tax rates

Answer 1

1. An average tax rate is the percentage of some total amount paid as tax. With income tax this = total amount of income tax you pay as a percentage of your total income.
   Average income tax rate = total income tax paid/ total income x 100
2. A marginal tax rate = the rate of tax you pay on any extra money. For income tax this ‘extra’ is the last £1 you earn - the marginal income tax rate is the rate paid on the last £1 of income.
   Marginal income tax rate = rate paid on last £1 of income
3. In the UK the marginal income tax rate increases as you earn over certain thresholds. It’s only the extra income that’s taxed at the higher rate, not your whole income.
4. Here’s an example using hte maringal rates of income tax in the UK for 2016/17:
   * look at example in revision book*

Question 2

The Government Spends Tax Revenue on Benefits and Services

Answer 2

You need to know where the government gets most of its tax revenue from, and how this revenue is spent.

1. Main sources of tax revenue:
   - Income tax (30% of central govt tax revenue
   - VAT (abt 20%)
   - National Insurance payments (abt 20%)
   - Excise Duties on goods like alcohol and fuel (abt 10%)
   - Corporation tax (abt 8%)
   - Council tax and Business rates (paid to local govt)
2. Main areas of govt expenditure
   - Social support including pensions (abt 40%)
   - National Health Service (abt 20%)
   - Education (abt 15%)
   - Debt Interest (abt 7%)
   - Police, Law Courts and Prisons (abt 5%)
   - Defence (abt 5%)