A widespread belief holds that crossing into a higher tax band can leave someone worse off. Under a marginal system that does not happen, because the higher rate applies only to the slice above the threshold.
Income is taxed in layers
A progressive system divides income into bands, each with its own rate. The first band is taxed at its rate regardless of how much is earned in total.
Only the amount that exceeds a threshold is taxed at the next rate up. Income already taxed in a lower band stays in that band permanently.
A pay rise that crosses a threshold therefore affects only the portion above it. The earlier layers are untouched.
The average rate is always lower than the marginal rate
The marginal rate is what applies to the next unit of income. The average rate is total tax divided by total income, and it blends every band together.
Because lower bands are included in that blend, the average always sits below the top rate reached. Someone in a higher band does not pay that rate on everything.
Confusing the two is the source of the misunderstanding. People quote the marginal rate and imagine it applied to the whole salary.
Where a real cliff can exist
Tax rates themselves do not create cliffs, but eligibility rules sometimes do. A benefit, allowance or credit that withdraws entirely at a fixed income point behaves differently.
Where withdrawal is gradual, the effect is a higher effective marginal rate over a range rather than a sudden loss. Where it is abrupt, a small rise in income can reduce net position.
These thresholds sit in the benefit and allowance rules rather than the rate table, which is why they are easy to miss.
Effective marginal rates can exceed the headline
Combining tax, social contributions and the withdrawal of an income-tested allowance produces a combined rate higher than any published band. Each component is modest, but they stack.
This matters most around the income ranges where several withdrawals overlap. The published rate table alone does not reveal it.
Calculating the effect requires modelling the specific combination that applies, and the rules differ by jurisdiction and change frequently.
Why the distinction changes decisions
Believing in a cliff that does not exist leads people to decline additional work or a promotion on the assumption they will lose money. In the rate table alone, they will not.
The reasonable question is what the next unit of income keeps after tax, which is the marginal rate, not what the whole salary keeps.
Where income-tested benefits are involved, the answer depends on specific thresholds and warrants advice tailored to the individual circumstances.