Corporation Tax Marginal Relief: How It Works (With Examples)

Ask a small company director what corporation tax rate they pay, and most of them will say either "19%" or "25%." Both answers might be wrong.

Since April 2023, the UK has had two corporation tax rates — and a band in between where the rate you pay depends on a formula most business owners have never seen. If your company's taxable profits fall between £50,000 and £250,000, you're in that middle band. And the maths isn't what you'd expect.

The three bands

Corporation tax in the UK works like this:

• Profits up to £50,000 — you pay 19% (the small profits rate)
• Profits above £250,000 — you pay 25% (the main rate)
• Profits between £50,001 and £250,000 — you get marginal relief, and your effective rate sits somewhere between 19% and 25%

These thresholds are confirmed for the current parliament, so they aren't changing any time soon.

The first two bands are straightforward. The third one trips people up.

Why the marginal rate is actually 26.5%

Here's the bit that confuses everyone. If your profits are in the marginal relief band, the effective tax rate on the slice of profit between £50,000 and £250,000 is 26.5% — higher than the main rate.

That sounds mad. Why would the tax on middle-band profits be higher than the rate for big companies?

It's because of how the relief is structured. The system starts by charging you 25% on your entire profit, then gives you a deduction to bring the bill down. That deduction shrinks as your profits rise. By the time you hit £250,000, the relief has tapered to zero and you're paying a flat 25%.

The taper creates a marginal rate of 26.5% on each additional pound of profit within the band. Your average rate across all your profit is still somewhere between 19% and 25% — but the rate on the extra income within that band is steeper.

Think of it like the personal tax system. The loss of the personal allowance between £100,000 and £125,140 creates an effective 60% rate on that slice. Same principle here, smaller numbers.

Worked examples

Numbers make this much clearer than any formula.

Example 1: £80,000 profit

Your company makes £80,000 in taxable profit. No associated companies, 12-month accounting period.

Without marginal relief, you'd pay 25% on the lot: £20,000.

With marginal relief, HMRC applies a deduction. The relief is calculated as:

(£250,000 − £80,000) × 3/200 = £2,550

So your actual tax bill is £20,000 − £2,550 = £17,450.

That's an effective rate of 21.8% — not 19%, not 25%.

Example 2: £150,000 profit

Now your company has a better year. Taxable profit: £150,000.

Tax at 25%: £37,500.

Marginal relief: (£250,000 − £150,000) × 3/200 = £1,500.

Tax bill: £37,500 − £1,500 = £36,000.

Effective rate: 24.0%. You're closer to the main rate now because you're further up the band.

Example 3: right in the middle at £100,000

Tax at 25%: £25,000.

Marginal relief: (£250,000 − £100,000) × 3/200 = £2,250.

Tax bill: £25,000 − £2,250 = £22,750.

Effective rate: 22.75%. Almost exactly halfway between 19% and 25%, which makes sense — you're roughly halfway through the band.

The associated companies trap

This is where directors with more than one company need to pay attention.

If you have associated companies, the £50,000 and £250,000 thresholds are divided equally between them. Two companies? The limits become £25,000 and £125,000 each. Three companies? £16,667 and £83,333.

This doesn't mean the companies share a tax bill. Each company files separately and pays its own corporation tax. But the thresholds are split, which can push you into a higher effective rate.

Example: £80,000 profit with one associated company

Same £80,000 profit as Example 1, but this time you have one associated company. The thresholds halve:

• Small profits limit: £25,000
• Upper limit: £125,000

Tax at 25%: £20,000.

Marginal relief: (£125,000 − £80,000) × 3/200 = £675.

Tax bill: £20,000 − £675 = £19,325.

Effective rate: 24.2% — compared to 21.8% without the associated company. That's nearly £1,900 more in tax on the same profit.

An associated company is broadly any company controlled by the same person or group. Dormant companies count too, unless they've never traded and have no assets. If you've got an old limited company sitting on Companies House doing nothing, it might be costing you money without you realising.

Short accounting periods

One more thing. If your accounting period is shorter than 12 months, the thresholds are reduced proportionally. A nine-month period means the limits become £37,500 and £187,500 instead of £50,000 and £250,000.

This usually only matters if you've recently incorporated or changed your accounting reference date.

What to actually do about it

A few practical points:

Know your effective rate. Don't assume you're paying 19% or 25%. If you're in the band, your actual rate is somewhere in between — and knowing the number helps you plan.

Think twice before incorporating a second company. There might be commercial reasons to split a business, but the corporation tax cost of halving your thresholds is real. Run the numbers first.

Time your profits where you can. If you're near the £50,000 threshold, pension contributions or capital expenditure timed before your year end could keep you in the small profits band. The difference between £49,000 and £51,000 in profit is more than just £2,000 in tax — it's the change in rate on everything above £50,000.

Talk to your accountant. Marginal relief is calculated automatically when you file your CT600, but tax planning around it requires someone who knows your full picture. The numbers above are simplified — they don't account for capital allowances, R&D credits, or any reliefs that might adjust your taxable profit before you even get to this stage.