Lessons · Accounting · a rate applies to a band, not to the whole
A rate applies to a band, not to the whole
Under a banded system, income is divided into slices and each slice is taxed at its own rate. Moving into a higher band means the higher rate applies to the part in that band, never to everything you earned.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
This one sentence dissolves most of the confusion and most of the folklore. People read a rate table as though the top rate that touches them applies to all their income, and every conclusion drawn from that reading is wrong, including some that change what they do for a living.
How to think about it
Take each band in turn. Work out how much income falls in it. Multiply by that band's rate. Add the pieces. The total is the tax, and no single rate applies to the whole.
Worked example
The lowest band, at its rateOften nil. Everybody gets this band.
The next band, on the part that reaches itOnly the slice inside the band.
The top band you reach, on the part above its thresholdNot on everything below it.
Add the pieces for the total taxA single multiplication is never the answer here.
Your turn
Name what a higher rate applies to when income crosses a threshold.
A higher rate applies only to the income the threshold
Solve one, graded on the server
The trap
Multiplying total income by the top rate that applies to any of it. It overstates the tax substantially and it is the arithmetic behind almost every wrong belief about how tax works.