Since April 2023, UK limited companies no longer pay corporation tax at a single rate. Profits up to £50,000 are taxed at 19%, profits over £250,000 are taxed at 25%, and companies in between benefit from corporation tax marginal relief — a taper that stops the tax bill jumping sharply as profits grow.
This guide explains how corporation tax marginal relief works, how the limits are shared between associated companies, and includes a worked example so you can see the calculation in practice.
The Two Corporation Tax Rates
There are two main rates of corporation tax for most companies:
- Small profits rate — 19%. This applies to companies whose augmented profits are £50,000 or less.
- Main rate — 25%. This applies to companies whose augmented profits are more than £250,000.
Augmented profits are your company’s taxable profits plus any franked investment income (broadly, dividends received from other companies). It is the augmented profits figure, not just taxable profits, that decides which band you fall into.
Between £50,000 and £250,000, neither rate applies in full. Instead, your company pays tax at the 25% main rate, less marginal relief. The result is an effective rate that rises gradually from 19% to 25% as profits increase.
How Corporation Tax Marginal Relief Works
Corporation tax marginal relief is calculated using a standard fraction of 3/200. The formula is straightforward:
Marginal relief = (Upper limit − your profits) × 3/200
Your corporation tax bill is then:
Tax payable = (Profits × 25%) − marginal relief
At the bottom of the band, the relief is worth exactly the difference between the two rates, giving an effective rate of 19%. At the top of the band, the relief falls to zero and the full 25% rate applies. In between, the effective rate climbs steadily — so earning a little more profit never triggers a sudden jump in your tax bill.
Associated Companies Share the Limits
If your company has associated companies, the £50,000 and £250,000 limits are shared between them. The limits are divided by the total number of associated companies, including your own company. For example, if there are two associated companies, each one has a lower limit of £25,000 and an upper limit of £125,000.
Companies are generally associated if one controls the other, or if the same person or group controls both. This is a common situation for groups of companies and for companies owned by the same family or business partners. The standard fraction of 3/200 stays the same; it is the limits that change.
It is important to check for associated companies when planning, because the shared limits can push a company into the main rate far sooner than expected. Dormant companies and some passive holding companies may be ignored for this purpose, but the rules are detailed and worth checking with an adviser.
Worked Example: Marginal Relief in Practice
The following is a worked example to show how the calculation works.
Example: A company has taxable profits of £100,000 for the year, no associated companies and no franked investment income.
- Step 1 — Tax at the main rate: £100,000 × 25% = £25,000.
- Step 2 — Marginal relief: (£250,000 − £100,000) × 3/200 = £150,000 × 0.015 = £2,250.
- Step 3 — Tax payable: £25,000 − £2,250 = £22,750.
The effective rate is £22,750 ÷ £100,000 = 22.75% — between the 19% small profits rate and the 25% main rate, exactly as the taper intends. The company saves £2,250 compared with paying the full main rate.
Practical Steps for Your Company
- Estimate your profits early. Rough out your taxable profits before the year end so you know which band you are heading for and can set money aside.
- Check for associated companies. If you control more than one company, work out the shared limits — and whether restructuring could help.
- Budget using the effective rate. For profits between the limits, budget on the tapered rate, not 19% or 25%.
- Keep your accounts up to date. Accurate, timely records make the year-end calculation and the return far simpler.
- Remember the payment deadline. Corporation tax is generally due 9 months and 1 day after the end of your accounting period, and your corporation tax return must be filed within 12 months of the year end.
Related reading: Starting out? Read our guide to how to set up a limited company in the UK, from choosing a name to registering for Corporation Tax.
Related reading: Developing something new? Read our guide to R&D tax relief for UK SMEs.
Frequently Asked Questions
Is corporation tax marginal relief applied automatically?
Yes. Marginal relief is claimed in your corporation tax return, and your tax is calculated with the relief included. You do not need a separate claim, but you do need to supply the correct figures — including any associated companies.
What happens if my company has associated companies?
The upper and lower limits are divided by the number of associated companies. That means less profit is taxed at the 19% rate, and the main rate comes into play sooner.
Is marginal relief the same as the old small companies rate?
No. This is a new system, introduced in April 2023, which replaced the single 19% rate for most companies. The relief only applies to profits between the lower and upper limits.
Does marginal relief apply to close investment-holding companies?
No. Close investment-holding companies pay corporation tax at the 25% main rate and do not benefit from the small profits rate or marginal relief.
How We Can Help
Corporation tax is one of the areas where good planning makes a real difference — from checking associated companies to budgeting for the right effective rate. Financial Accounting Firm prepares corporation tax returns and advises limited companies on their liabilities. Contact us to discuss your company’s position.
This article is general information only and should not be taken as personal tax or financial advice. Tax rules can change, and your position will depend on your own circumstances.
