Marginal Relief Explained: Why Your Corporation Tax Isn't Always a Flat Rate

If your company's taxable 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.

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

How Marginal Relief Is Calculated

For profits in the marginal band, you:

1. Calculate tax at the main rate (25%)
2. Subtract marginal relief

For companies with no associated companies, the formula simplifies to:

Marginal Relief = 3/200 x (£250,000 - Taxable Profit)

Or even simpler: Marginal Relief = 0.015 x (£250,000 - Profit)

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

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.

How Associated Companies Affect the Thresholds

If your company has associated companies (companies under common control), the £50,000 and £250,000 thresholds are divided by the total number of associated companies (including yours).

Example: You have 2 associated companies (total = 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:

1. Report your taxable profit
2. Calculate tax at the main rate (25%)
3. Calculate and claim marginal relief
4. 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?"
Yes — trading profits, investment income, and chargeable gains all count toward your total taxable profit for marginal relief purposes.

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%.