What is a Tax Bracket

A tax bracket is a range of income subject to a specific tax rate in a progressive income tax system. Progressive systems divide income into tiers — each tier above the previous is taxed at a higher rate. The critical insight: only the income within each bracket is taxed at that bracket's rate. Moving into a higher bracket does not raise the rate on all your income — only on the income above the threshold.

tax-bracket income-tax progressive-tax marginal-rate how-tax-works

Quick reference

Tax bracket

Income range taxed at specific rate

Only income within the bracket gets that rate

Marginal rate

Rate on the last euro earned

Highest bracket rate that applies

Netherlands brackets 2025

36,97% and 49,50%

Two-bracket system above the tax credit floor

UK brackets 2025/26

20%, 40%, 45%

Three main rates plus personal allowance

How tax brackets work — the slice principle

Imagine income as a stack of money in layers. The first layer — say the first 37.000 — is taxed at a low rate. The next layer, from 37.000 to 75.000, is taxed at a medium rate. Any income above 75.000 sits in the top layer and is taxed at the highest rate. Each layer is independent. Adding more income to the top layer does not change the tax on the layers below.

This is why the common fear — I cannot earn more because it will push me into a higher tax bracket and I will be worse off — is mathematically impossible in a well-designed progressive system. Moving into a higher bracket always increases your total take-home income. Only the increment above the threshold is taxed at the higher rate. The income below the threshold continues to be taxed at the lower rate.

The exception is when moving into a higher bracket triggers a phase-out of means-tested benefits or tax credits. In those cases, an extra euro of income can temporarily reduce net income — not because of the bracket rate itself, but because of benefit clawback. This is sometimes called a marginal effective tax rate above 100%, which occurs in specific income ranges in the UK and Netherlands.

Understanding brackets is the foundation of all income tax planning — from deciding when to exercise share options, to timing pension contributions, to evaluating the real cost of a pay rise.

The progressive tax calculation

Formula

\text{Total Tax} = \sum_{i=1}^{n} (\min(\text{Income}, B_{i+1}) - B_i) \times r_i

For each bracket, multiply the income that falls within that bracket by the bracket's rate. Sum the results across all applicable brackets. The total is the gross income tax before any credits or deductions.

B_iThe lower threshold of bracket i (the point where that bracket begins)

B_{i+1}The upper threshold of bracket i (where the next bracket begins)

r_iThe tax rate for bracket i — applied only to income within that bracket

nThe number of brackets that the income reaches

Netherlands 2025 tax brackets

The Netherlands has a two-bracket system for Box 1 income in 2025. Bracket 1: 36,97% on income up to 75.518. Bracket 2: 49,50% on income above 75.518. These rates include both income tax and the national insurance premium (premies volksverzekeringen), which are collected together as a combined rate.

The effective tax burden is significantly reduced by two main tax credits: the algemene heffingskorting (general tax credit, income-dependent, maximum approximately 3.070) and the arbeidskorting (employment tax credit, maximum approximately 5.158 in 2025). Both credits phase out at higher incomes — the arbeidskorting starts phasing out above approximately 39.000 and is fully phased out above approximately 124.000.

The combined effect of these credits creates a situation where the effective rate — total tax divided by total income — is substantially below the bracket rates. A 60.000 earner with a 36,97% marginal rate typically pays an effective rate of approximately 27 to 30% of gross income after credits.

UK 2025/26 tax brackets

The UK has a three-bracket system with a personal allowance that acts as a zero-rate band. Personal allowance (zero rate): 12.570. Basic rate (20%): 12.571 to 50.270. Higher rate (40%): 50.271 to 125.140. Additional rate (45%): above 125.140.

The personal allowance phases out for incomes above 100.000 — at a rate of 1 of allowance lost for every 2 of income above 100.000. This creates an effective marginal rate of 60% for income between 100.000 and 125.140, as each extra 2 earned costs 1 in tax (40% rate) plus loses 1 of 0%-taxed allowance (another 40% x 50%). This is one of the UK system's most unusual features.

National Insurance adds to the effective burden: Class 1 NI is 8% between 12.570 and 50.270, and 2% above 50.270. This means the combined marginal rate for most UK employees is 28% (20% + 8%) in the basic rate band and 42% (40% + 2%) in the higher rate band.

Worked examples

Example 1Netherlands — income crossing two brackets

Given: Gross income: 85.000 | Netherlands 2025

Result: Bracket 1 tax: 27.929 | Bracket 2 tax: 4.694 | Total before kortingen: 32.623

Bracket 1 (36,97% on 75.518): 75.518 x 0,3697 = 27.929. Bracket 2 (49,50% on 85.000 - 75.518 = 9.482): 9.482 x 0,495 = 4.694. Total before kortingen: 27.929 + 4.694 = 32.623. After applying kortingen (approximately 700 at this income level): approximately 31.923. Effective rate: 31.923 / 85.000 = 37,6%. Marginal rate: 49,50%.

Example 2UK — the 60% band illustration

Given: Income: 110.000 | UK 2025/26 | Personal allowance phase-out applies

Result: Adjusted personal allowance: 7.570 | Extra income of 1.000 costs 600 in tax | Effective marginal rate: 60%

At 110.000, the personal allowance has been reduced by (110.000 - 100.000) / 2 = 5.000. Remaining allowance: 12.570 - 5.000 = 7.570. For the next 1.000 earned: 400 is taxed at 40% (as income above the higher rate threshold) = 400 in tax. Additionally, 500 more of the personal allowance is lost, adding 500 taxed at 40% = 200. Total tax on 1.000: 600. Effective marginal rate: 60%.

Example 3Same gross income, different brackets — why it matters

Given: Person A: single income of 80.000 NL | Person B: two incomes of 40.000 each NL

Result: Person A: total tax approximately 29.000 | Person B: combined tax approximately 19.000 | Difference: 10.000

Person A: 75.518 at 36,97% = 27.929 plus 4.482 at 49,50% = 2.219. Total: 30.148. Less kortingen (approximately 700): 29.448. Person B each: 40.000 at 36,97% = 14.788. Less kortingen (approximately 2.500 each): approximately 12.288 each. Combined: 24.576. Difference: 29.448 - 24.576 = 4.872. Fiscal partnership allows division of income between partners, which is why two earners often pay less total tax than one earner at double the income.

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Netherlands 2025 and UK 2025/26 bracket comparison

Country	Bracket	Income Range	Rate
Netherlands	Bracket 1	Up to 75.518	36,97%
Netherlands	Bracket 2	Above 75.518	49,50%
UK	Personal allowance	Up to 12.570	0%
UK	Basic rate	12.571 to 50.270	20%
UK	Higher rate	50.271 to 125.140	40%
UK	PA phase-out band	100.001 to 125.140	60% effective
UK	Additional rate	Above 125.140	45%

Common tax bracket misconceptions

✗ Believing a pay rise into a higher bracket makes you worse off

✓ This is the most pervasive tax myth. In a standard progressive system, a pay rise always increases net income because only the portion above the threshold is taxed at the higher rate. A 1.000 rise that crosses a threshold where the excess is taxed at 40% means 600 extra net income on the crossing portion — less than if it were all in the lower bracket, but still positive. The exception is means-tested benefit clawback in specific income ranges, not the bracket system itself.

✗ Applying the marginal rate to total income when estimating take-home pay

✓ A 100.000 earner in the Netherlands with a 49,5% marginal rate does not take home 100.000 x (1 - 0,495) = 50.500. Only a portion of their income is in the 49,5% bracket. The rest is taxed at 36,97% and further reduced by tax credits. Actual take-home is substantially higher — approximately 62.000 to 65.000. Use an income tax calculator for accurate estimates.

✗ Confusing tax brackets with benefit entitlement thresholds

✓ Tax brackets are only about income tax rates. Separate thresholds determine eligibility for benefits, housing allowances, healthcare subsidies, and child benefits. These can create genuine cliff edges where earning slightly more causes a loss of a benefit worth more than the extra income. These cliff effects are separate from the bracket system and require specific knowledge of the benefit in question.

Methodology

Netherlands 2025 rates from official Belastingdienst publications. UK 2025/26 rates from HMRC. Netherlands heffingskortingen estimated using income-dependent phase-out tables. UK National Insurance rates included in effective rate examples. All calculations assume a single employed taxpayer with no additional deductions.

Tax brackets and rates change annually. Always verify current thresholds with the official tax authority for your country before making financial decisions based on bracket calculations.

Cite this guide

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https://calquify.com/guides/what-is-a-tax-bracket

Last updated: May 2026

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Frequently asked questions

Can moving into a higher tax bracket ever make you worse off?

In a pure progressive tax system, no. The higher rate applies only to the income above the threshold — so any increase in gross income always produces an increase in net income. However, in real-world systems, crossing income thresholds can trigger phase-outs of tax credits (like the UK personal allowance above 100.000), loss of means-tested benefits, or clawback of allowances. In these specific ranges, the effective marginal rate can exceed 100%. This is a flaw in benefit design, not in the bracket system itself.

Why does the Netherlands only have two tax brackets?

The Netherlands effectively uses a two-bracket system in Box 1: 36,97% up to 75.518 and 49,50% above. This was introduced as part of a simplification of the Dutch tax system. The graduated impact of the system is largely achieved through the income-dependent phase-out of tax credits (heffingskortingen) rather than through multiple brackets. As incomes rise above approximately 39.000, the arbeidskorting phases out, creating a higher effective marginal rate than the headline 36,97% rate would suggest.

How do tax brackets work for self-employed people?

Self-employed people (ZZP in the Netherlands, sole traders in the UK) pay income tax on their profit using the same brackets as employees. However, they also benefit from entrepreneur deductions (like the zelfstandigenaftrek in the Netherlands or the Trading Allowance in the UK) that reduce the taxable profit before applying the brackets. The marginal rate on the last euro of taxable profit is the same as for an employee at the equivalent income level.

Sources & References

› Belastingdienst — Tarieven inkomstenbelasting 2025 Retrieved 2026-05-18

› HMRC — Income Tax rates and Personal Allowances Retrieved 2026-05-18

Formula based on standard mathematical and financial methods. Results are for informational purposes. Last reviewed May 2026. Version 1.