Corporation Tax Marginal Relief: Does Your UK Company Qualify?

Since April 2023, the UK Corporation Tax system has two rates: 19% for smaller companies and 25% for larger ones. Between these extremes lies a band — profits between £50,000 and £250,000 — where marginal relief applies. If your company falls in this range, understanding how marginal relief works is important, because the effective tax rate you pay is neither 19% nor 25%.

The Two Rates and the Band Between Them

Taxable Profits	Corporation Tax Rate
Up to £50,000	19% (small profits rate)
£50,001 – £250,000	Marginal relief applies — effective rate between 19% and 25%
Over £250,000	25% (main rate)

Marginal relief tapers the rate gradually between the two thresholds, so a company with profits of £150,000 does not suddenly pay 25% on everything — it pays an effective rate somewhere between 19% and 25%.

How the Marginal Relief Calculation Works

The marginal relief formula is:

In practice, you calculate tax at 25% first, then subtract the marginal relief deduction. The result is an effective rate that increases smoothly from 19% to 25% as profits rise through the band.

Worked Example: Company with £120,000 Profit

• Tax at 25% main rate: £30,000
• Marginal Relief: 3/200 × (£250,000 – £120,000) × (£120,000 / £120,000) = £1,950
• Corporation Tax payable: £30,000 – £1,950 = £28,050
• Effective rate: 23.4%

Associated Companies: The Critical Complication

The £50,000 and £250,000 thresholds are divided by the number of associated companies your company has. This is one of the most commonly misunderstood aspects of the current Corporation Tax regime.

Two companies are associated if one controls the other, or both are under common control. Common examples include:

• Two companies owned by the same individual
• A holding company and its subsidiary
• Two companies owned by the same partnership

If you own three companies, the thresholds are divided by three. This can significantly affect your tax position and means companies with modest profits can find themselves in the marginal relief band unexpectedly.

Accounting Period Apportionment

The thresholds are annual figures. If your accounting period is shorter than 12 months, the thresholds are reduced proportionally. A nine-month accounting period uses 9/12 of the annual thresholds.

Short Accounting Periods and Year-End Planning

Marginal relief creates an effective marginal rate of approximately 26.5% on profits within the band — higher than the 25% main rate on profits above £250,000. This is counter-intuitive but correct: profits in the marginal band are actually taxed more heavily than profits above the main rate threshold, per pound.

This makes year-end tax planning particularly valuable for companies in the marginal relief band. Accelerating deductible expenditure or making employer pension contributions before the year-end can reduce profits out of the marginal band and into the small profits rate, saving at an effective rate of 26.5%.

Does Your Company Qualify for Marginal Relief?

Check whether your taxable profits fall between the adjusted thresholds (after dividing for any associated companies). If they do, you should:

• Ensure your Corporation Tax return correctly claims the marginal relief
• Review year-end planning opportunities to manage your profit level
• Consider employer pension contributions — a particularly efficient lever in the marginal band
• Confirm with your accountant that all associated company relationships have been identified and the thresholds correctly reduced