What an effective tax rate is
Your effective tax rate is the share of your income that goes to tax over a year: total tax divided by income, times 100. Economists call the same number the average tax rate, and it is the figure that tells you what living in a country actually costs you.
The top of the fraction is every tax charged on that income: national income tax, regional or municipal surcharges, and the social contributions a self-employed person pays on profit. Contributions belong in the sum wherever they are compulsory, because they come out of the same profit, and the social security rules for nomads decide which country's system you pay into.
The bottom of the fraction is your income, and you have to say which income: gross pay for an employee, profit (revenue minus business costs) for the self-employed, or taxable income after allowances. The same bill gives a different rate on each base, so a comparison only works when every country is divided by the same one.
Effective vs marginal tax rate: the difference
Your marginal tax rate is the rate on the next dollar you earn. Progressive systems tax income in slices, and as the IRS puts it, "you pay the higher rate only on the part that's in the new tax bracket." The marginal rate belongs to the top slice you reach; the effective rate blends every slice below it, including the allowance that is taxed at nothing.
Effective and marginal tax rates side by side
| Effective tax rate | Marginal tax rate | |
|---|---|---|
| What it measures | Total tax as a share of total income | Tax on the next unit of income |
| Where it comes from | Your full return: every band, allowance and contribution | The bracket your top slice of income falls in, plus any contribution on that slice |
| Question it answers | What does this country cost me at my income? | What will an extra contract, a raise or a bonus cost me? |
| UK sole trader, $100,000 revenue, 2026 to 2027 | 24.3% of profit | 42% |
Use the marginal rate for decisions at the edge: whether to take on extra work, what a pension contribution saves, what a raise is worth after tax. Use the effective rate to budget and to compare countries, because it alone reflects what you pay in total.
Taking extra work that crosses a bracket line
Works
As a single filer, you take a $5,000 project that lifts your taxable income from $48,000 to $53,000. Only the $2,600 above $50,400 is taxed at 22% under the IRS's 2026 brackets; the other $2,400 of the project is taxed at 12%, so it adds $860 of federal income tax and leaves you $4,140 better off.
Fails
You turn the project down because it would push you into the 22% bracket, on the belief that all $53,000 would then be taxed at 22%. A bracket only reprices the slice of income inside it, so refusing the work costs you the $4,140 you would have kept.
How to calculate your effective tax rate
The calculation needs your final figures for a full tax year. Amounts withheld or prepaid during the year are installments toward a bill that is settled on the return, so they can be higher or lower than the tax you actually owe.
Working out your effective tax rate
- Take your income before tax for the year: gross pay if you are employed, revenue minus deductible business costs if you are self-employed.
- Add up every tax charged on that income from your final returns: income tax, local or regional surcharges, and compulsory social contributions.
- Leave out VAT or sales tax you charged clients and paid over, since it is collected from them rather than taken from your income.
- Divide the total tax by the income and multiply by 100.
- For your marginal rate, find the bracket your last slice of income falls in and add any contribution rate charged on that slice.
- To compare countries, repeat the sum on the same income and the same base in each one.
If you earn in one currency and file in another, convert both the tax and the income at the same rate. A rate is a ratio, so it survives the conversion, but a bill in pounds divided by income in dollars does not.
Worked example: a UK freelancer with $100,000 of revenue
Take a sole trader living in the UK who invoices foreign clients $100,000 a year, the profile behind the Index's UK figures: £75,396 (about $100,000) of revenue, minus costs at 15%, leaves £64,086 (about $85,000) of profit.
For 2026 to 2027 the first £12,570 (about $16,700) is covered by the Personal Allowance, the next £37,700 (about $50,000) is taxed at 20% and income above £50,270 (about $66,700) at 40%, under HMRC's income tax rates. Class 4 National Insurance comes on top at 6% on profit between £12,570 (about $16,700) and £50,270 (about $66,700) and 2% above it, from HMRC's rates for the self-employed.
| Revenue | £75,396 (about $100,000) |
|---|---|
| Profit after costs at 15% | £64,086.18 (about $85,000) |
| Income tax at 0% on the first £12,570Personal Allowance | £0 |
| Income tax at 20% on the next £37,700 | £7,540 (about $10,000) |
| Income tax at 40% on the last £13,816 | £5,526.47 (about $7,330) |
| Class 4 National Insurance at 6% on £37,700 | £2,262 (about $3,000) |
| Class 4 National Insurance at 2% on £13,816 | £276.32 (about $366) |
| Total tax: 24.3% of profit | £15,605 (about $20,700) |
HMRC rates for April 6, 2026 to April 5, 2027, converted at the exchange rates the Index uses, read September 28, 2026. Rows are shown to the penny; the total is rounded to the pound.
Divide the tax before rounding, £15,604.79 (about $20,700), by the £64,086.18 (about $85,000) of profit and the effective rate is 24.3%. The next pound of profit pays 40% income tax plus 2% Class 4, so the marginal rate is 42%, 17.7 points above the effective rate, because most of the profit is taxed in the lower slices.
The base changes the answer too. Measured against revenue instead of profit, the same bill is 20.7%, so a rate means little until you know whether it is on revenue, profit or taxable income.
- Marginal rate
- Effective rate
Source: HMRC income tax and Class 4 National Insurance rates for 2026 to 2027, listed under Sources; arithmetic by Nomad Tax Map
Show the numbers
| £15k | £35k | £55k | £75k | £95k | £115k | £135k | £155k | |
|---|---|---|---|---|---|---|---|---|
| Marginal rate | 26% | 26% | 42% | 42% | 42% | 62% | 47% | 47% |
| Effective rate | 4.2% | 16.7% | 21.4% | 26.9% | 30.1% | 34.8% | 37.7% | 38.9% |
The effective rate climbs smoothly and stays well under the marginal rate at every level. Between £100,000 (about $133,000) and £125,140 (about $166,000) the marginal rate jumps to 62%, because HMRC withdraws the Personal Allowance at half the speed income rises above the lower figure, so each extra pound also turns 50 pence of allowance into taxable income.
Why top tax brackets mislead when you compare countries
A country's headline rate is its top marginal rate, and most freelancers pay it on a slice of their income at most. What they pay depends on the allowance, the width of each band, the social contributions on top and any regime that replaces the ordinary scale, so the top rate and the effective rate put countries in a different order.
- Effective rate at $100,000 revenue
- Rest of the top bracket
Source: Nomad Tax Index country data (top bracket and effective rate at $100,000)
Show the numbers
| Effective rate at $100,000 revenue | Rest of the top bracket | Total | |
|---|---|---|---|
| Portugal (simplified regime) | 42.7% | 5.3% | 48% |
| Spain (Madrid) | 33.9% | 11.1% | 45% |
| United Kingdom | 24.3% | 20.7% | 45% |
| Italy (impatriate regime) | 31.9% | 11.1% | 43% |
| Ireland | 29.8% | 10.2% | 40% |
| Singapore | 6.1% | 17.9% | 24% |
| Georgia (small business status) | 1.2% | 18.8% | 20% |
The UK and Madrid share a 45% top rate, yet the UK freelancer pays 9.6 points less, because at this income Spain takes more in both income tax and social security. Georgia's ordinary income tax is 20%, but an individual entrepreneur with small business status pays 1% of gross income under articles 88 to 90 of the Tax Code, which is 1.18% of profit at these costs.
Among the income tax rates by country, Hungary's flat 15% sits 30 points below the UK's 45% top rate, yet a Hungarian sole proprietor with $100,000 of revenue pays 29.2% of profit once social contributions and the local business tax are added, against 24.3% in the UK. Some regimes have no marginal rate at all on the income they cover: a lump sum tax is a fixed yearly amount, so every extra unit of foreign income lowers its effective rate.
Judge every lever for paying less tax legally, a new residence, a regime or a company, by the effective rate it leaves at your own income, not by the rate printed on it.
A tax on revenue is not a rate on profit
A turnover tax gets heavier as your margin shrinks. The 1% that Georgia's small business status charges on gross income, under articles 88 to 90 of the Tax Code, is 2% of profit with costs at 50%, and 20% of profit for a business with a 5% margin, the same as Georgia's ordinary income tax rate. Convert every turnover tax to a share of profit at your own margin before you compare it with an income tax.
Effective tax rate with a company: corporate tax plus tax on the payout
A corporate headline rate says even less. Reliefs for small profits, refunds to shareholders and taxes on distributions move the real number, and the profit only reaches you once it is paid out, usually as a dividend that can be taxed again.
Effective tax on $100,000 of profit of a one-person service company (Nomad Tax Index data, checked September 29, 2026)
| Company in | Headline corporate rate | Profit kept in the company | Profit paid out to an owner abroad |
|---|---|---|---|
| Malta | 35% | 35% | 5% |
| United Kingdom | 25% | 21.5% | 21.5% |
| Estonia | 22% | 0% | 22% |
| Singapore | 17% | 8.17% | 8.17% |
| Romania | 16% | 16% | 29.44% |
| Georgia | 15% | 0% | 19.25% |
| Hungary | 9% | 11.14% | 24.47% |
| United Arab Emirates | 9% | 0% | 0% |
Malta's 35% falls to 5% once a Maltese company pays a dividend and the shareholder claims the refund, while Hungary's 9% turns into 24.47% by the time the profit reaches its owner. An Estonian company pays nothing on profit it keeps and 22% when it distributes, so a founder who lives on the money pays the 22% in the end.
The table stops at the company's border. Whatever the owner's country of residence charges on the dividend comes on top.
Effective tax rate when 2 countries tax the same income
When 2 countries tax the same income, your effective rate is both taxes added together and divided by that income. The tax treaty between the 2 countries decides which one taxes first and often caps the tax withheld at source on dividends, interest and royalties.
Your country of residence then removes the overlap. With a credit it charges its own tax and subtracts what you paid abroad, up to its own tax on that income, the cap the IRS applies to US taxpayers, so a salary for work done abroad, taxed at 15% there and 30% at home, costs 30% in all. With an exemption it leaves the salary out and it costs 15%, so whether your country uses a foreign tax credit or an exemption sets the effective rate on income that both countries tax.
How the Nomad Tax Index scores the effective rate
The Index's reference profile is a non-US citizen who is self-employed, sells services to clients outside the country, and has no local clients or employees, with $100,000 of revenue and costs at 15%, so $85,000 of profit. Each country is priced under the most favorable structure its law offers a new resident who makes no investment.
The tax on that profit, social contributions included, becomes an effective rate. That puts a progressive income tax, a turnover tax, a flat regime and a country with no income tax on the same scale, from the UAE's 0% to the 42.7% a freelancer pays under Portugal's simplified regime.
We price 3 incomes, $50,000, $100,000 and $250,000, and the score uses the effective rate at $100,000. That rate falls into 1 of 7 bands, from 0% to over 35%, and the band carries up to 50 of the 100 points: a country at 0% takes all 50, one over 35% takes none.
The UK's 24.3% falls in the 15% to 25% band and takes 16 of the 50 points; Portugal's 42.7% is over 35% and takes none.
David's note
When 2 countries come out within a few points of each other at a client's current income, I price both again at double that income before choosing. Progressive scales keep climbing and turnover regimes such as Georgia's 1% stop at a revenue ceiling, so the cheaper country today is not always the cheaper one once the business grows.
