Corporation Tax Marginal Relief Explained

Corporation Tax Marginal Relief Explained

If your company's profits fall between £50,000 and £250,000, you're in the marginal relief zone. You won't pay the full 25% corporation tax rate — but you won't pay just 19% either. You'll pay something in between, calculated using a specific formula.

This guide explains marginal relief in plain English: what it is, who qualifies, how to calculate it, and how to claim it on your CT600.

What Is Marginal Relief?

Marginal relief is a tax mechanism that creates a gradual transition between the small profits rate (19%) and the main rate (25%) of corporation tax. Without it, a company earning £50,001 would suddenly pay 25% on all its profits — a cliff edge that would be deeply unfair.

Instead, marginal relief ensures your effective tax rate increases gradually as your profits rise from £50,000 to £250,000. Think of it as a sliding scale:

The relief reduces your tax bill compared to what you'd pay at the full 25% rate. The higher your profits within this band, the less relief you get — until it tapers away entirely at £250,000.

Who Qualifies for Marginal Relief?

You qualify if all of the following apply:

1. Your accounting period starts on or after 1 April 2023 — marginal relief was reintroduced from this date
2. Your augmented profits are between £50,000 and £250,000 — below £50,000 you pay 19% automatically; above £250,000 you pay 25% with no relief
3. You're a UK-resident company — or a non-UK company with a UK permanent establishment

What are "augmented profits"?

Augmented profits = taxable total profits + exempt distributions received from non-group companies.

In practice, for most small companies, augmented profits equal your taxable profits. Exempt distributions are mainly dividends received from non-group companies — if you don't receive dividends from other companies, you can ignore this.

The associated companies trap

Here's the crucial detail many directors miss: the £50,000 and £250,000 thresholds are divided by the number of associated companies plus one.

A company is "associated" if it's controlled by the same person or group of persons. If you and your spouse each own a separate limited company, those companies are associated — halving both thresholds.

Read our detailed guide on associated companies and thresholds for the full rules.

The Marginal Relief Formula

HMRC's formula for marginal relief is:

Marginal relief = 3/200 × (Upper limit – Augmented profits) × (Taxable total profits / Augmented profits)

Let's break this down:

• 3/200 is the marginal relief fraction (equivalent to 1.5%)
• Upper limit is £250,000 (or reduced for associated companies / short accounting periods)
• Augmented profits is your taxable profits plus exempt distributions
• Taxable total profits / Augmented profits adjusts for cases where you've received exempt distributions

For most small companies where augmented profits = taxable total profits, the formula simplifies to:

Marginal relief = 3/200 × (Upper limit – Profits)

The relief amount is subtracted from the tax calculated at the full 25% rate.

Worked Examples

Example 1: Simple Company, £100,000 Profit

Company: Single company, no associated companies, 12-month accounting period, profits of £100,000, no exempt distributions.

Step 1: Calculate tax at the main rate £100,000 × 25% = £25,000

Step 2: Calculate marginal relief 3/200 × (£250,000 – £100,000) = 3/200 × £150,000 = £2,250

Step 3: Subtract the relief £25,000 – £2,250 = £22,750

Effective rate: £22,750 / £100,000 = 22.75%

Without marginal relief, this company would pay £25,000. With it, they save £2,250.

Example 2: Company with One Associated Company

Company: One associated company (director's spouse has a separate limited company), profits of £80,000, 12-month period.

Adjusted thresholds: Lower limit = £25,000, Upper limit = £125,000.

Because profits exceed the adjusted lower limit (£25,000), the company isn't in the small profits band. And because profits are below the adjusted upper limit (£125,000), marginal relief applies.

Step 1: Tax at main rate £80,000 × 25% = £20,000

Step 2: Marginal relief 3/200 × (£125,000 – £80,000) = 3/200 × £45,000 = £675

Step 3: Tax payable £20,000 – £675 = £19,325

Effective rate: £19,325 / £80,000 = 24.16%

Notice the effective rate is much higher than Example 1 despite lower profits — because the associated company halved the thresholds.

Example 3: Company at the Lower Limit

Company: No associated companies, profits of exactly £50,000.

At £50,000, the company pays the small profits rate: £50,000 × 19% = £9,500.

No marginal relief calculation is needed — the small profits rate applies in full.

Example 4: Short Accounting Period

Company: No associated companies, 6-month accounting period, profits of £60,000.

For short periods, the limits are time-apportioned:

• Lower limit: £50,000 × 6/12 = £25,000
• Upper limit: £250,000 × 6/12 = £125,000

Profits of £60,000 fall between the adjusted limits.

Step 1: Tax at main rate £60,000 × 25% = £15,000

Step 2: Marginal relief 3/200 × (£125,000 – £60,000) = 3/200 × £65,000 = £975

Step 3: Tax payable £15,000 – £975 = £14,025

Effective rate: £14,025 / £60,000 = 23.38%

The Hidden Marginal Rate: 26.5%

Here's a quirk of marginal relief that catches people off guard: the marginal rate on profits between £50,000 and £250,000 is approximately 26.5% — higher than the 25% main rate.

How? Each additional pound of profit in the marginal relief band is taxed at 25% AND reduces your marginal relief. The combined effect means each extra pound costs you about 26.5p in tax.

What this means in practice:

If your profits are just above £50,000, it might be worth checking whether additional allowable expenses could bring you below the threshold. Claiming £1,000 of legitimate expenses saves you £265 in tax (at the 26.5% marginal rate), not just £190 (at 19%) or £250 (at 25%).

Conversely, if you're just below £250,000, you're paying 26.5% on those last pounds — actually more than you'd pay above £250,000. There's no planning opportunity here though, since you wouldn't want to earn more just to get a lower marginal rate on the excess.

How to Claim Marginal Relief on Your CT600

Marginal relief is claimed on your CT600 form. The relevant boxes are:

• Box 620 — Corporation tax chargeable at the main rate (25%)
• Box 625 — Marginal relief
• Box 630 — Corporation tax net of marginal relief

Manual calculation vs software

If you're filing using HMRC's online service, you need to calculate marginal relief yourself and enter the correct figure in Box 625.

If you're using filing software like TaxPipe, marginal relief is calculated automatically. You enter your profits and the number of associated companies — the software does the rest. This is one of the key advantages of using software over HMRC's basic online service.

Common Marginal Relief Mistakes

1. Forgetting associated companies

The most expensive mistake. If you have associated companies and don't account for them, you'll use the wrong thresholds and underpay tax. HMRC can — and does — check this.

2. Not time-apportioning for short periods

If your accounting period is shorter than 12 months (common for first-year companies or companies changing their accounting period), you must reduce the thresholds proportionally.

3. Ignoring exempt distributions

If your company receives dividends from a non-group company, these increase your augmented profits without increasing taxable profits. This can push you into the marginal relief band or reduce the relief available, even though those dividends aren't directly taxed.

4. Applying marginal relief to the wrong period

Marginal relief only applies to accounting periods starting on or after 1 April 2023. If your accounting period straddles this date, you may need to split it — with the pre-April 2023 portion taxed at the flat 19% rate and the post-April 2023 portion subject to the new rates.

5. Double-counting the company itself

You count associated companies in addition to your own company. If you have one associated company, you divide by 2 (your company + one associated company). Don't accidentally divide by 1.

Marginal Relief and Tax Planning

Understanding marginal relief opens up legitimate tax planning opportunities:

Pension contributions

Pension contributions reduce your taxable profits. If you're in the marginal relief band, a £10,000 pension contribution saves £2,650 in corporation tax (at the ~26.5% marginal rate) rather than £1,900 at 19% — a significant difference.

Timing of expenses

If you can legitimately time expenses to fall in a year when profits are in the marginal relief band, the tax saving per pound is maximised. This isn't about artificial arrangements — just sensible timing of genuine business decisions.

Salary vs dividends

The salary vs dividends decision interacts with marginal relief. Higher salary reduces taxable profits (potentially moving you closer to the 19% threshold) but increases employer's NIC. The optimal balance depends on where your profits sit relative to the thresholds.

Capital expenditure timing

Capital allowances reduce taxable profits. If you're planning a significant purchase, timing it to fall in a year when profits are in the marginal relief band maximises the tax deduction's value.

Marginal Relief Calculator

Rather than calculating by hand, use our corporation tax calculator to see exactly how much tax you'll pay and how much marginal relief applies. Or see a detailed worked example with the full calculation.

Frequently Asked Questions

Do I need to claim marginal relief or is it automatic?

You need to claim it on your CT600. It's not applied automatically by HMRC. Filing software like TaxPipe calculates and claims it for you.

What if my profits are exactly £50,000?

You pay the small profits rate of 19%. Marginal relief isn't needed because you're at or below the lower limit.

What if my profits are exactly £250,000?

You pay the main rate of 25%. At the upper limit, marginal relief is zero.

Does marginal relief apply to all types of profit?

Yes — trading profits, investment income, property income, and capital gains all count toward your total profits for marginal relief purposes.

Can I get marginal relief if I'm a sole trader?

No. Marginal relief only applies to corporation tax, which only applies to limited companies. Sole traders pay income tax on business profits.

How do I know if I have associated companies?

A company is associated with yours if both are under the control of the same person or persons. Read our full guide to associated companies for detailed rules and examples.

What was marginal relief called before 2023?

The concept is the same, but previously it was called "marginal small companies' relief" or sometimes "tapering relief." It existed from 1973 to 2015, was abolished when the rate was unified at 20% (then 19%), and was reintroduced in April 2023.

The Bottom Line

Marginal relief prevents a cliff edge between the 19% small profits rate and the 25% main rate. If your profits are between £50,000 and £250,000, it saves you real money — but you need to claim it correctly.

The key things to remember:

• The formula gives relief that reduces your tax from the 25% rate
• Associated companies reduce your thresholds (potentially significantly)
• The effective marginal rate in the band is ~26.5%, making expenses particularly tax-efficient
• Filing software calculates this automatically — no need to do the maths yourself

Ready to file your CT600 with marginal relief calculated automatically? Start with TaxPipe — enter your profits, tell us about associated companies, and we handle the rest.

Related Articles

• UK Corporation Tax Rates: Complete History