Marginal relief: what it is and whether you're entitled to it

From 1 April 2023, UK corporation tax moved from a single flat rate to a two-rate system. Companies with taxable profits up to £50,000 pay 19%. Companies with profits above £250,000 pay 25%. Between those two limits, a mechanism called marginal relief ensures the transition is smooth rather than a cliff edge.

Marginal relief reduces the amount of tax you pay when your profits fall in the band between £50,000 and £250,000. It means your effective rate rises gradually from 19% to 25% as profits increase, rather than jumping straight to 25% the moment you pass £50,000.

The three-rate structure

How the calculation works

HMRC calculates marginal relief using what they call the Standard Fraction: 3/200. The formula is:

You then subtract the marginal relief from the tax at the full 25% main rate:

This formula is slightly simplified. In cases where a company has exempt distributions (like dividends from another company), HMRC uses an "augmented profits" figure. For the vast majority of single-director trading companies, taxable profit and augmented profit are the same thing.

Worked example

Suppose your company has a taxable profit of £100,000 for the year ending 31 March 2026.

Effective rates across the band

Here is how the effective rate changes across different profit levels:

Associated companies

The profit limits of £50,000 and £250,000 are divided by the number of associated companies. If you control two companies, the limits for each company become £25,000 and £125,000 respectively. This is important if you own more than one limited company.

Two companies are associated if one controls the other, or both are controlled by the same person or group. Dormant companies count too, unless they have never traded and have no assets other than shares in other group members.

If you have associated companies, your marginal relief band may be much narrower than you expect. A company with one associate enters the marginal band at just £25,000 of profit.

What this means for year-end planning

If your projected profit is close to £50,000, it may be worth reviewing your options before the year end:

• Director pension contributions. Employer pension contributions paid by the company reduce your taxable profit pound for pound. A £10,000 company pension contribution on a £55,000 profit brings you back to the 19% rate.
• Capital equipment. If you were planning to buy equipment anyway, doing it before year end means you can claim the Annual Investment Allowance and reduce this year's taxable profit.
• Director salary timing. If you pay yourself a salary, making sure all PAYE for the year is processed before the period end confirms the deduction in the right year.

None of these are tax evasion; they are legal deferrals or genuine business expenditure. The key is to make decisions based on your actual business needs, not solely on the tax outcome.

Short accounting periods

If your accounting period is shorter than 12 months (which happens in your first period or if you change your year end), the £50,000 and £250,000 limits are proportionally reduced. A 9-month period uses limits of £37,500 and £187,500.

Does NVC Comply calculate marginal relief automatically?

Yes. NVC Comply applies the marginal relief calculation automatically when you file your CT600. If your taxable profit falls in the band, the relief is calculated using the standard HMRC formula and shown in your computation before you submit. You do not need to calculate it yourself or remember the formula.