UK Corporation Tax has two headline rates, 19% and 25%, but many companies pay something in between. This article explains how marginal relief bridges the two rates, how the calculation runs and why the number of associated companies matters.
What are the two Corporation Tax rates?
According to GOV.UK, the Corporation Tax rate for company profits is 25%, and it applies to companies with profits above £250,000. A small profits rate of 19% applies to companies with profits of £50,000 or less. GOV.UK states that these rates have applied since 1 April 2023, and that before then a single rate applied to all companies.
The two thresholds, £50,000 and £250,000, are known as the lower and upper limits. Profits between them do not fall off a cliff from one rate to the other. Instead, a sliding scale called marginal relief applies. GOV.UK describes it as providing a gradual increase in the Corporation Tax rate between the small profits rate and the main rate.
What is marginal relief, in plain terms?
Marginal relief is a deduction from the tax that would be due at the 25% main rate. The nearer a company’s profit is to £250,000, the smaller the deduction; the nearer to £50,000, the larger it is. At £50,000 the relief brings the bill down to exactly 19% of profit, and at £250,000 it falls to nothing.
The effect is that, within the band, each extra pound of profit is taxed at a higher rate than the pounds before it. HMRC’s Company Taxation Manual gives the underlying figures: the difference between the main rate and the marginal rate is expressed as a fraction, 3/200, or 1.5%, which implies a marginal rate of 26.5% inside the band. Legislation.gov.uk confirms that the Finance Act 2021 set the standard marginal relief fraction at 3/200ths and the standard small profits rate at 19% for the financial year 2023.
How is the relief calculated?
For a company with no associated companies, whose profits sit between the limits, HMRC’s manual gives this formula:
Marginal relief = F × (U − A) × (N ÷ A)
- F is the standard marginal relief fraction, set by Parliament for each financial year. The manual’s example uses 3/200.
- U is the upper limit, £250,000 in the manual’s example.
- A is the company’s augmented profits for the accounting period.
- N is its taxable total profits.
Augmented profits are taxable profits plus certain exempt distributions. For many small companies the two are the same, so N ÷ A is 1 and the formula simplifies to 3/200 × (£250,000 − profit).
The manual includes its own worked case for a period ended 30 September 2026. Taxable profits of £90,000 and £8,000 of qualifying exempt distributions give augmented profits of £98,000. Tax at the main rate is £22,500. Relief is 3/200 × (£250,000 − £98,000) × (£90,000 ÷ £98,000), which the manual gives as £2,094, leaving a liability of £20,406.
What does it look like at different profit levels?
The table below applies the simple version of the formula to a company with no associated companies and no exempt distributions. It is illustrative arithmetic, not a tax computation.
| Taxable profit | Tax at 25% | Marginal relief | Tax due | Average rate |
|---|---|---|---|---|
| £50,000 | £12,500 | £3,000 | £9,500 | 19.0% |
| £100,000 | £25,000 | £2,250 | £22,750 | 22.75% |
| £150,000 | £37,500 | £1,500 | £36,000 | 24.0% |
| £200,000 | £50,000 | £750 | £49,250 | 24.625% |
| £250,000 | £62,500 | £0 | £62,500 | 25.0% |
Each relief figure is 3/200 × (£250,000 − profit). For £100,000, that is 0.015 × £150,000 = £2,250.
Why is the effective rate 26.5% on the extra profit?
The table shows the average rate drifting up from 19% to 25%. The rate on each additional pound is higher than either. Moving from £50,000 to £250,000 of profit raises the tax bill from £9,500 to £62,500, an increase of £53,000 on £200,000 of extra profit. That is 26.5%.
This is a feature of the scale rather than an error. Because the average rate must climb from 19% to 25% over a band of £200,000, the extra tax has to be collected at more than 25% in that band. For a company thinking about whether a project or hire is worth the cost, the relevant figure is the after-tax return on the margin, not the headline rate. That connects to the reasoning in how companies decide where to invest, where the return on each extra pound of capital is the test.
Do associated companies change the limits?
Yes. GOV.UK says the lower and upper limits are proportionately reduced by the number of associated companies a company has. Its guidance gives an example: with three other associated companies, the limits are divided by four, so the lower limit becomes £12,500 and the upper limit becomes £62,500. The guidance does not define “associated company” on the page covering rates, so groups and owners of several businesses should read the full HMRC guidance.
Illustrative arithmetic shows why this matters. Take a company with £50,000 of profit and those reduced limits:
- Tax at 25%: £12,500.
- Relief: 3/200 × (£62,500 − £50,000) = £187.50.
- Tax due: £12,312.50, an average rate of 24.625%.
A standalone company with the same profit would pay 19%, or £9,500. The difference of £2,812.50 is the cost of the limits being shared across a group.
What about short accounting periods and exclusions?
GOV.UK states that the limits are also proportionately reduced where an accounting period is shorter than 12 months. The page does not show the calculation, so companies in that position should check HMRC’s detailed guidance or use the official marginal relief calculator, which GOV.UK says is for Corporation Tax profits from 1 April 2023 onwards.
Marginal relief is not available to everyone. GOV.UK says a company cannot claim if its profits, including certain distributions from unrelated, unassociated companies, go over £250,000. It also cannot claim if it is a non-UK resident company or a close investment holding company.
Why does the band matter for business planning?
For owner-managed firms, the band between £50,000 and £250,000 is where many decisions about pay, pensions, equipment and timing of income are made. A rise in profit does not simply move a business from one rate to another; it changes the average rate gradually and the rate on the margin sharply.
Profit is also not the same as cash. As explained in why growing businesses still run out of cash, a company can book taxable profit while waiting for customers to pay, and the tax bill still falls due on a fixed date. Understanding the shape of the rate scale helps with forecasting that liability. The difference between accounting and taxable profit is also worth knowing, which is covered in why revenue and profit tell different stories.
Rising costs can pull profit down into a lower part of the band, and the relief then increases. How businesses manage rising costs looks at the pressures behind that.
Conclusion: a sliding scale, not a cliff edge
Marginal relief turns two headline rates into a smooth scale: 19% at £50,000 of profit, 25% at £250,000 and a marginal rate of 26.5% in between, using a fraction of 3/200 that the manual applies in its 2026 example. Associated companies and short accounting periods shrink the band, and some companies are excluded altogether. Anyone relying on a figure for a real tax computation should check the official calculator and HMRC guidance for the relevant accounting period.
This article provides general information, not personalised financial or tax advice. Rules, rates and thresholds change.
Sources: GOV.UK; Legislation.gov.uk
