Effective Tax Rate
Income tax paid as a percentage of pre-tax profit, measured against the statutory rate
What is Effective Tax Rate?
Effective tax rate is the percentage of pre-tax profit that a company actually pays in income tax. It shows the real tax burden after allowances, reliefs and differences between accounting and tax rules.
It often differs from the headline tax rate, and changes in it can significantly affect net profit.
How this KPI is measured
- Function
- Finance
- Sub-function
- Tax
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- %
- Measurement frequency
- Annual
- Formula
- (Income tax expense / Pre-tax profit) × 100
How to calculate it
Divide income tax expense by pre-tax profit, and multiply by 100.
For example, if tax expense is 1,900,000 on pre-tax profit of 10,000,000, the effective rate is 19%.
Understand the reconciliation between the headline rate and the effective rate, which usually includes items such as disallowed expenses, reliefs and overseas profits.
Where it is used
Planning and forecasting
Estimate tax charge.
Explaining profit changes
Reconcile differences.
Reporting to stakeholders
Provide transparency.
How to improve it
Tips and common mistakes
- Use only lawful tax planning and follow disclosure rules.
- One-off items can distort the rate.
- Take specialist advice for complex structures.
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