Marginal Relief Explained (Simple Version)
Short version. A director-friendly explanation of marginal relief and why tax isn't always a flat percentage.
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If your company's profits are between £50,000 and £250,000, you're in the "marginal relief" band, and your effective tax rate isn't simply 19% or 25%. Here's how it actually works, including the part most explanations skip: exactly which profit figure the thresholds are tested against.
Why Marginal Relief Exists
Before April 2023, all companies paid corporation tax at a flat 19%. Now there are two rates:
- 19% for profits up to £50,000 (small profits rate)
- 25% for profits over £250,000 (main rate)
But what about profits in between? Without marginal relief, a company making £50,001 would suddenly pay 25% on everything — a massive jump. Marginal relief creates a gradual transition between the two rates.
The Three Corporation Tax Bands
| Taxable Profit | Rate | How It Works |
|---|---|---|
| £0 - £50,000 | 19% | Simple: profit x 19% |
| £50,001 - £250,000 | 19% to 25% | Main rate minus marginal relief |
| Over £250,000 | 25% | Simple: profit x 25% |
How Marginal Relief Is Calculated
For profits in the marginal band, you:
- Calculate tax at the main rate (25%)
- Subtract marginal relief
The full formula is:
Marginal Relief = 3/200 x (£250,000 - Augmented Profits) x (Taxable Profits / Augmented Profits)
For most companies, augmented profits and taxable profits are the same number, and that last fraction is 1. So the formula simplifies to:
Marginal Relief = 0.015 x (£250,000 - Profit)
The two differ only when the company has exempt income, which in practice means dividends received from other companies. That case has its own section below, and it is the one thing about marginal relief that most explanations leave out.
Worked Examples
Example 1: Profit of £100,000
Step 1: Calculate tax at 25%
£100,000 x 25% = £25,000
Step 2: Calculate marginal relief
3/200 x (£250,000 - £100,000) = 0.015 x £150,000 = £2,250
Step 3: Subtract relief from tax
£25,000 - £2,250 = £22,750
Effective rate: £22,750 / £100,000 = 22.75%
Example 2: Profit of £75,000
Step 1: Tax at 25%: £75,000 x 25% = £18,750
Step 2: Marginal relief: 0.015 x (£250,000 - £75,000) = £2,625
Step 3: Final tax: £18,750 - £2,625 = £16,125
Effective rate: 21.5%
Example 3: Profit of £200,000
Step 1: Tax at 25%: £200,000 x 25% = £50,000
Step 2: Marginal relief: 0.015 x (£250,000 - £200,000) = £750
Step 3: Final tax: £50,000 - £750 = £49,250
Effective rate: 24.625%
Quick Reference: Effective Tax Rates
| Taxable Profit | Corporation Tax | Effective Rate |
|---|---|---|
| £50,000 | £9,500 | 19.00% |
| £75,000 | £16,125 | 21.50% |
| £100,000 | £22,750 | 22.75% |
| £125,000 | £29,375 | 23.50% |
| £150,000 | £36,000 | 24.00% |
| £175,000 | £42,625 | 24.36% |
| £200,000 | £49,250 | 24.63% |
| £225,000 | £55,875 | 24.83% |
| £250,000 | £62,500 | 25.00% |
Notice how the rate gradually increases from 19% to 25% as profits rise through the band.
The "26.5% Trap"
Here's something that catches directors off guard: within the marginal band, each additional pound of profit is effectively taxed at 26.5%, not 25%.
Why? Because as your profit increases, you lose marginal relief. The combination of 25% tax plus lost relief equals 26.5% on each marginal pound.
This doesn't mean you should avoid making more profit — it's still better to earn more. But it explains why the effective rate rises so steeply through this band.
Dividends Received Can Change Your Band Without Being Taxed
The £50,000 and £250,000 thresholds are not tested against your taxable profits. They are tested against your augmented profits, which is your taxable total profits plus exempt distributions, mostly dividends your company received from other companies.
This produces a result that surprises people. Dividends received are exempt from corporation tax, so they are never taxed. But they still count when HMRC decides which rate applies.
Example: a company has £40,000 of trading profit and receives a £30,000 dividend from shares it holds in an unconnected company.
- Taxable profits: £40,000. This is what tax is charged on.
- Augmented profits: £70,000. This is what the thresholds are tested against.
On taxable profits alone the company looks like a 19% small profits company paying £7,600. Because augmented profits are £70,000, it is actually in the marginal band. Tax is charged on the £40,000 at 25%, less marginal relief scaled by the ratio of taxable to augmented profits: 0.015 x (£250,000 - £70,000) x (£40,000 / £70,000) = £1,542.86. The tax is £8,457.14.
A dividend that is never taxed added £857.14 to the bill, purely by moving the company into a different band. This is why the ratio at the end of the formula matters: it stops the company claiming relief on profits it is not paying tax on.
One exception. Dividends from a company in the same group, meaning a 51% subsidiary of yours, a company you are a 51% subsidiary of, or a fellow subsidiary, are left out of augmented profits.
How Associated Companies Affect the Thresholds
Divide the £50,000 and £250,000 limits by the number of other associated companies plus this company. See HMRC's conditions and exclusions.
Example: You have one other associated company. Including this company gives a divisor of 2.
- Lower threshold: £50,000 / 2 = £25,000
- Upper threshold: £250,000 / 2 = £125,000
This means you enter the marginal band sooner and hit the full 25% rate at a lower profit level.
What Counts as an Associated Company?
A company is associated if:
- One controls the other, OR
- Both are under common control
"Control" generally means owning more than 50% of the shares or voting rights. Dormant companies may be excluded in some circumstances — but the rules are complex. If you have multiple companies, consider professional advice.
Marginal Relief and Your CT600
When you file your CT600, HMRC expects you to:
- Report your taxable profit
- Calculate tax at the main rate (25%)
- Calculate and claim marginal relief
- Report the net corporation tax due
The CT600 has specific boxes for marginal relief calculations. If you're using software like SimpleCompanyTax, this is calculated automatically.
Common Questions
"Do I need to claim marginal relief, or is it automatic?"
You need to include it in your CT600 calculation. It's not automatically applied by HMRC — you must calculate and claim it.
"What if my profit is exactly £50,000?"
You pay 19% (£9,500). Marginal relief only applies above £50,000.
"What if my profit is exactly £250,000?"
You pay 25% (£62,500). At this point, marginal relief reduces to zero.
"Does marginal relief apply to all types of profit?"
Trading profits, rental income, interest and chargeable gains all count towards the taxable profit that tax is charged on. Dividends received are different: they are exempt, so they are never taxed, but they still count towards the augmented profits used to pick your band. See the section above.
Summary
Marginal relief ensures a smooth transition between the 19% small profits rate and the 25% main rate. If your profits are between £50,000 and £250,000, you pay 25% on your profits minus marginal relief (calculated as 0.015 x (£250,000 - profit)), resulting in an effective rate between 19% and 25%. Two things move the thresholds: associated companies divide them, and dividends received count towards the profits they are tested against even though the dividends themselves are not taxed.
Close investment-holding companies cannot claim marginal relief. Apply the statutory purpose test for each tax period. Read CIHC rates and CT600 box 4 code 2 and the worked comparison of marginal relief and CIHC tax.