Profit growth usually feels like a clear sign that a business is moving in the right direction. Revenue is improving, more cash is being generated, and the company may finally have room to invest or expand. However, as profits rise, the tax position can start changing faster than many directors expect.
A company earning £45,000 in taxable profits sits in a very different Corporation Tax position from one earning £75,000 or £150,000. The difference is not simply that “more profit means more tax”. Once profits move beyond certain levels, the way Corporation Tax is calculated becomes more important.
This is where Corporation Tax Marginal Relief starts to matter. It affects companies whose profits fall between the small profits and main Corporation Tax limits. For growing businesses, understanding this band can make a real difference to forecasting, cash flow, and year-end tax planning.
Key Takeaways
- The 19% small profits rate can apply at profits of £50,000 or less.
- The 25% main rate generally applies once profits exceed £250,000.
- Marginal Relief bridges the gap between these two limits.
- Additional profits within the range can effectively face tax at 26.5%.
What Is Marginal Relief?
Corporation Tax Marginal Relief prevents an immediate jump from the 19% small profits rate to the 25% main rate. HMRC calculates Corporation Tax at 25%, then deducts relief using the standard 3/200 fraction. The relief gradually reduces as augmented profits approach the £250,000 upper limit.
Distributions, associated companies, and shorter accounting periods can change the calculation, so the standard thresholds will not apply in every case.
The standard formula is:
Marginal Relief = (F × (U − A)) × (N ÷ A)
Here, F is the Marginal Relief fraction and U is the upper limit. A represents augmented profits, while N represents taxable total profits.
Source: HMRC Company Taxation Manual: Marginal Relief calculation
How the effective rate changes
Based on HMRC’s current Marginal Relief calculation, assume a company has no associated companies and no relevant distributions.
|
Taxable profit |
Marginal Relief |
Corporation Tax |
Effective rate |
|
£40,000 |
£0 |
£7,600 |
19.00% |
|
£60,000 |
£2,850 |
£12,150 |
20.25% |
|
£100,000 |
£2,250 |
£22,750 |
22.75% |
|
£150,000 |
£1,500 |
£36,000 |
24.00% |
|
£200,000 |
£750 |
£49,250 |
24.63% |
|
£250,000 |
£0 |
£62,500 |
25.00% |
The company’s average tax rate therefore rises gradually rather than changing immediately at £50,000.
Why the 26.5% Rate Matters
HMRC confirms that the marginal Corporation Tax rate within the standard Marginal Relief band is 26.5%. This does not mean the company pays 26.5% on all its profits. It means each additional pound within that range can produce tax at that effective rate.
Source: HMRC Company Taxation Manual: Marginal Relief calculation
For example, consider a company whose taxable profits rise from £100,000 to £110,000. Assuming nothing else changes, that extra £10,000 can create about £2,650 of additional Corporation Tax. The company still retains about £7,350 before accounting for later extraction taxes.
Growth therefore remains worthwhile. The important issue is understanding how much additional profit remains available for reinvestment, dividends, debt repayments, or working capital.
Accounting Profit Is Not Enough
Accounting profit and taxable profit are not always identical. Tax computations can adjust depreciation, capital expenditure, disallowable expenses, capital allowances, losses, and other items. Chargeable gains and investment income can also affect the Corporation Tax calculation.
(Source: GOV.UK Company Tax Returns)
A company showing £48,000 accounting profit should therefore not assume that 19% automatically applies. Well-prepared statutory accounts provide the starting figures. The Corporation Tax computation then establishes the taxable position used for the final liability.
Augmented Profits Can Change Relief
Marginal Relief also depends on augmented profits. Broadly, augmented profits include taxable total profits plus certain qualifying distributions from unrelated companies. This can reduce relief even when those distributions do not increase taxable total profits in the usual way.
Consider a company with £90,000 of taxable profits and significant qualifying distributions from an unrelated company. Looking only at the £90,000 figure could overstate the relief. The Corporation Tax calculation should therefore consider both taxable and augmented profits.
(Source: HMRC Company Taxation Manual: Definition of augmented profits)
Profits Moving Into Marginal Relief?
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Associated Companies Reduce the Limits
Associated companies create one of the biggest Corporation Tax Marginal Relief traps. The standard £50,000 and £250,000 limits do not apply separately to every company under common control.
Two companies are generally associated when one controls the other. They can also become associated when the same person or persons control both. An overseas company can count as an associated company as well.
HMRC divides the limits by the total number of companies in the calculation. This includes the company whose Corporation Tax position you are reviewing.
For a twelve-month accounting period:
|
Companies in calculation |
Lower limit |
Upper limit |
|
1 |
£50,000 |
£250,000 |
|
2 |
£25,000 |
£125,000 |
|
3 |
£16,667 |
£83,333 |
|
4 |
£12,500 |
£62,500 |
A second company can therefore bring the original business into Marginal Relief much earlier. The associated company does not need to make the same level of profit.
(Source: HMRC: Corporation Tax limits with associated companies)
The wider ownership rules can become complex, particularly around family companies and shared control. The associated companies guide explains those rules in more detail.
The Cost of One Extra Company
Consider a company with £120,000 of taxable and augmented profits. Assume it has a twelve-month accounting period and initially has no associated companies.
Corporation Tax at 25% equals £30,000. Marginal Relief is £1,950, leaving Corporation Tax of £28,050.
Now assume the shareholder also controls another active company. The lower limit becomes £25,000, while the upper limit falls to £125,000. At £120,000 profit, only £75 of Marginal Relief remains.
The Corporation Tax bill becomes £29,925. Nothing changed in the first company’s profits, yet the tax increased by £1,875.
Before establishing another company, directors should consider the wider Corporation Tax effect. Company formation support can form part of that wider structural review.
Short Periods Can Catch Companies Out
The Corporation Tax thresholds also reduce when the accounting period lasts less than twelve months. HMRC adjusts both limits proportionately according to the length of the period.
For a six-month accounting period, the standard £50,000 lower limit would broadly reduce to £25,000. The £250,000 upper limit would broadly reduce to £125,000. HMRC calculates the precise adjustment by reference to the actual period.
Associated companies can reduce those shortened limits again. A short accounting period combined with several associated companies can therefore produce surprisingly low thresholds.
(Source: HMRC CTM03930: Short accounting periods)
Plan While Choices Still Exist
Marginal Relief is most useful as a planning issue before year-end. Directors should therefore forecast taxable profits rather than relying only on turnover. They should then consider existing commercial plans and the tax treatment of those plans.
A year-end review may cover:
• expected taxable and augmented profits;
• current and newly associated companies;
• planned qualifying capital expenditure;
• available capital allowances;
• trading losses and other available reliefs;
• director remuneration already under consideration;
• expected Corporation Tax and cash requirements.
HMRC provides several Corporation Tax allowances and reliefs where the required conditions apply. These include capital allowances and qualifying loss relief.
Tax should not encourage unnecessary spending. Spending £1 purely to save 26.5p of Corporation Tax still leaves the business poorer.
The better approach is reviewing genuine commercial expenditure before timing becomes fixed. Proactive tax planning advice can help assess the tax effect alongside the commercial decision.
Marginal Relief Affects Cash Flow
A growing Corporation Tax liability also affects cash flow. For most companies, payment is due nine months and one day after the accounting period ends, while the Company Tax Return is normally due after 12 months. A company with a 31 March 2026 year-end would normally pay by 1 January 2027, so the liability should be estimated well before filing.
Professional Corporation Tax support can help connect the tax computation with payment planning and the CT600 filing requirement.
Common Marginal Relief Mistakes
Common problems include:
• applying 19% to the first £50,000 and 25% above it;
• using accounting profit instead of taxable profit;
• overlooking augmented profits;
• failing to identify associated companies;
• ignoring a short accounting period;
• assuming an overseas associated company does not count;
forecasting every additional pound at only 25%.
An associated company can count even when it was associated for only part of the accounting period. HMRC can disregard a company that carried on no trade or business during the relevant period. The underlying activity should therefore be checked rather than assumed.
Get Ahead of the Tax Curve
Corporation Tax Marginal Relief becomes more important as profits rise because the tax cost changes throughout the band. Knowing your likely taxable profit before year-end gives you more time to plan cash flow and genuine business decisions.
If profits are approaching the limits, a Corporation Tax review can help establish the likely liability before payment becomes due.
