Understanding Marginal Tax Rates

When you earn a paycheck, you're probably aware that you pay taxes. But did you know that not all your income is taxed at the same rate? This is where marginal tax rates come in. Let's break it down so you can understand how it works and why it's important.

What Is a Marginal Tax Rate?

A marginal tax rate is the tax rate you pay on each additional dollar you earn. It changes depending on how much you make. The government uses different tax rates for different levels of income. In Singapore, the marginal tax rate refers to the tax rate applied to an individual’s highest dollar of chargeable income.

For example, the first part of your income might be taxed at a lower rate, while the additional income you make might be taxed at a higher rate. 

How Does It Work?

Let's say you currently make $80,000 a year, and you're considering a raise to $90,000 a year. You might be worried that your new income will be taxed at a higher rate. But here's the good news: only the additional income you make above $80,000 will be taxed at the higher rate.

Here's how it breaks down:

- The first $80,000 of your income will continue to be taxed at the same rate as before. Let’s say you’re taxed at 10% at your first income. That’s an $8,000 tax.

- The additional $10,000 you earn (the difference between $80,000 and $90,000) will be taxed at the higher rate. Let’s say it’s 12% tax on the additional salary. That’s $1,200 tax.

So, even though you'll pay a higher tax rate on the extra $10,000, your overall income still benefits from the lower tax rate on the first $80,000. 

Tax Residency:

  • Tax rates in Singapore depend on an individual’s tax residency status.
  • You are considered a tax resident for a particular Year of Assessment (YA) if you fall into one of the following categories:
    • Singapore Citizen or Singapore Permanent Resident residing in Singapore (except for temporary absences).
    • Foreigner who has stayed/worked in Singapore for at least 183 days in the previous calendar year or continuously for 3 consecutive years.
    • Foreigner who has worked in Singapore for a continuous period straddling 2 calendar years with a total stay of at least 183 days (excluding directors, public entertainers, or professionals).

Progressive Taxation:

  • Singapore’s personal income tax rates for resident taxpayers are progressive. This means higher income earners pay a proportionately higher tax.
  • Currently, the highest personal income tax rate is 22% for chargeable income exceeding $320,000.
  • Starting from Year of Assessment 2024, the top marginal tax rate will increase to 24%:
  • Chargeable income between $500,000 and $1 million will be taxed at 23%.
  • Chargeable income exceeding $1 million will be taxed at 24%.

Tax Rates for Resident Taxpayers (From YA 2024). Here are the progressive tax rates for resident taxpayers:

First $20,000: 0%

Next $10,000: 2%

Next $10,000: 3.50%

Next $40,000: 7%

Next $40,000: 11.5%

Next $40,000: 15%

Next $40,000: 18%

Next $40,000: 19%

Next $40,000: 19.5%

Next $40,000: 20%

Next $180,000: 22%

In excess of $320,000: 24%.

What Does This Mean for You?

If you're offered a raise, it doesn't mean you should decline it just because of the higher tax rate. You'll still benefit from the extra income, even if the additional amount is taxed at a higher rate.

Don't be afraid to negotiate a raise or accept one when offered. In the end, more money in your pocket can make a big difference, even with the higher tax rate on the additional income.

Final Thoughts

Understanding how marginal tax rates work can help you make better decisions about your income and potential raises. Remember, even if you have to pay a higher tax rate on the additional income, it's still beneficial overall.

If you ever have questions about your taxes or how they work, don't hesitate to reach out to a financial expert or accountant. They'll be able to give you personalized advice and help you understand your specific situation.

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