Skatteministeriet
8. april 2016

Marginal tax for all taxpayers

The average marginal tax rate, or income tax on the last earned Danish krone, for all taxpayers and their socio-economic groups

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Marginal tax for all taxpayers

The marginal tax rate shows how much income tax is paid on the last earned krone or any extra money earned.

The size of the marginal tax rate is decided to a large degree by the amount the taxpayer's income exceeds the lower limits for the various income tax brackets. For example, the marginal tax on wage income will depend on whether the income is above the top tax bracket. If so, the marginal tax will be greater since you also have to pay top tax on any extra money earned.

The marginal tax rate influences factors such as labour supply and savings and in recent years it has been a central parameter in the political taxation debate and in the tax reforms and adjustments that have taken place.

Often used alongside marginal tax is the concept of average tax, which measures the total tax payment in relation to the total income. Representative calculations of average tax are shown on a separate page. If the tax system is progressive the marginal tax rate will be greater than the average tax rate.

Table 1 shows the taxation scale's marginal tax rates of different incomes in an average municipality. The first column shows the marginal tax rate on an income on which income tax and labour market contributions are payable. An example of this is wage income. The second column shows the marginal tax rate on an income on which income tax is paid but labour market contributions are not. Examples of this are social and private pensions, unemployment benefits, and state educational support.

Furthermore, the table also shows marginal taxation rates/deductible values for capital income, as well as the tax allowance value for assessment oriented deductions.

Table 1. Marginal tax percentages in an average municipality 2016
Types of income tax Personal income on which labour market contributions are payable1) Personal income on which labour market contributions are not payable Positive net capital income Negative net capital income Assessment oriented deductions
Below DKK 50,0002) Above DKK 50.0002)
  Pct. Pct. Pct. Pct. Pct. Pct.
Municipal taxes - - - 33.6 28.6 28.6
Municipal, health contributions and bottom-bracket tax 40.33) 37.7 37.5 - -
Municipal, health contributions, bottom- and top bracket tax 56.4 52.74) 42.7 - -

1) Marginal tax is calculated as the tax rate excluding labour market contribution multiplied by 0.92 and with an additional 8%.
2) The threshold amount of a married couple’s negative net capital income is DKK 100,000.
3) Including employment allowance.
4) Excluding tax on large pensions. If tax on large pensions is paid, the marginal tax is 56.7 pct.

The marginal tax percentages are calculated by using a municipal tax rate corresponding to that in an average municipality. In 2016 this was 25.6% including church tax. The rates vary from municipality to municipality, however the highest rates are capped.

For example, a wage earner in an average municipality earning DKK 300,000 in personal income and paying municipal and church tax, state health contributions, bottom-bracket tax and labour market contributions, has a marginal tax percentage rate on an extra earned krone of 40.3% in 2016 as seen in table 1.

Table 2 shows how people are divided according to various stages on the taxation scale and how they are affected by the different marginal tax rates on any extra income earned. These calculations have been based on representative calculations on the law model and show how taxpayers are grouped according to the size of their marginal tax rate in 2014.

The marginal tax percentage has here been defined as an increase in income tax and labour market contributions as a consequence of an extra income of DKK 100 or an extra allowance of DKK 100. It is assumed that there are no expenses involved with acquiring this extra income.

Table 2. Taxpayers shown according to marginal tax rates in 2016
Marginal tax percentage Number of people with change in:
  Personal income on which labour market contributions are payable1) Personal income on which labour market contributions are not payable2) Capital
income
Assessment oriented deductions
Pct. (1,000) Pct. (1,000) Pct. (1,000) Pct. (1,000) Pct.
0 0 0.0 557 11.3 562 11.5 566 11.5
1 - 19 564 11.5 8 0.2 5 0.1 2 0.0
20 - 29 2 0.0 2 0.0 285 5.8 3,621 73.8
30 - 34 3 0.1 42 0.9 2,354 48.0 700 14.3
35 - 39 979 19.9 3,607 73.5 1,651 33.6 19 0.4
40 - 44 2,754 56.1 137 2.8 48 1.0 0 0.0
45 - 49 74 1.5 72 1.5 1 0.0 0 0.0
50 - 59 531 10.8 481 9.8 2 0.0 1 0.0
60 - 1 0.0 1 0.0 1 0.0 0 0.0
All taxpayers 4,908 100.0 4,908 100.0 4,908 100.0 4,908 100.0
Average marginal tax rate for all 38.9 35.2 30.7 25.6

Note: Law model calculations based on a random sample of 3.3% of the population. Data from 2013 calculated for 2016 based on December 2015 predictions.
1) Increase in income tax and labour market contributions on an extra wage income of DKK 100.
2) Increase in income tax on an extra income of DKK 100 (e.g. pension).
Labour market contribution will always be payable on wage income so that no one has a total marginal tax rate for wage income including labour market contributions of zero, see table 2.

From table 2 the following can be inferred:

  • Labour market contribution will always be payable on wage income so that no one has a total marginal tax rate for wage income including labour market contributions of zero.
  • Around 11% of taxpayers or around 557,000 persons have a marginal tax rate of zero on a change of income on which labour market contribution is not payable. This is partly due to the fact that their income does not exceed their personal allowance, and partly because a change in income does not have any effect on the income tax payable by their spouses.
  • Approximately 1,000,000 taxpayers pay between 35% and 39% on extra income earned, and approximately 2.8 million taxpayers pay between 40% and 44% in tax and labour market contributions on any extra income earned. This means that about ¾ of all taxpayers have a marginal tax rate between 35% and 44%. Taxpayers in these groups consist mainly of those who pay municipal taxes, heath contributions and bottom-bracket tax but not top-bracket tax.
  • About 11% of all taxpayers, which corresponds to approximately 530,000 persons, pay a marginal tax on wage income of 50% or above. This will typically be people paying the top-bracket tax.
  • The division of marginal tax rates on capital income is more compact than the corresponding division for wage income and the level is lower. About two out of three taxpayers have a marginal tax rate on capital income below 35%. This covers people with negative net capital income (taxable value of tax relief on interest). The remainders of taxpayers have a positive net capital income.
  • Variations in marginal tax rates regarding assessment oriented deductions are caused by variations in the municipal tax rates, which in 2016 vary from 23% to 29% (including church tax).

The reduced range in marginal taxation of capital income in table 2 is repeated in table 3 showing the average marginal tax rates for all taxpayers divided by socio-economic groups. When considering these rates it should be noted that the rate can vary considerably around the average in the individual groups.

The group of top management has the highest average marginal tax rate of wage income including labour market contribution of around 51%.

The marginal tax rate for transfer income to pensioners, early retirement pensioners and the unemployed is around 37% to38%.

Table 3. Average marginal tax rates for socio-economic groups in 2016
Socio-economic group Average marginal tax on change in:
  Personal income on which labour market contributions are payable1) Personal income on which labour market contributions are not payable2) Capital income Assessment oriented deductions
  Pct. Pct. Pct. Pct.
Self-employed and spouses 41.8 38.0 31.0 25.9
Wage earners 44.0 40.4 33.9 28.5
Top management 51.3 47.3 33.4 28.5
High level wage earners 47.6 43.5 33.3 28.1
Medium level wage earners 44.6 40.6 33.7 28.6
Basic level wage earners 42.4 38.9 34.3 28.8
Other wage earners 41.6 38.4 34.3 28.8
Wage earners, not reported 42.5 39.0 33.3 27.9
Unemployed and on sickness benefit 40.3 37.6 33.9 28.6
Students 20.3 14.4 13.8 11.9
Early retirement pensioners and pensioners 40.5 37.9 35.3 28.7
Other non-working groups 21.3 15.7 14.4 12.2
In work 43.9 40.2 33.7 28.4
Not in work 33.1 29.3 27.2 22.4
All taxpayers 38.9 35.2 30.7 25.6

Note: Law model calculations based on a random sample of 3.3% of the population. Data from 2013 calculated for 2016 based on December 2015 predictions. The socio-economic groupings have been made according to Statistics Denmark's socio-economic Classification. (Opens in a new window).
Note: The groups' marginal tax rates have been calculated as the average of the individual person's marginal tax rate.
1) Increase in income tax and labour market contribution from an extra wage income of DKK 100.
2) Increase in income tax from an extra income of DKK 100. (For example, pension or unemployment insurance).