Since April 2023, the UK has operated a two-rate corporation tax system. If your company's taxable profits are £50,000 or less, you pay the small profits rate of 19%. If your profits exceed £250,000, you pay the main rate of 25%. But what happens if your profits fall between those two thresholds?
That is where marginal relief comes in — and it is one of the most misunderstood areas of UK business tax. Many company directors assume they either pay 19% or 25%, with nothing in between. In reality, the effective rate for companies in the marginal band can be anywhere from 19% to 26.5%, depending on exactly where your profits land.
How Marginal Relief Works
If your taxable profits fall between £50,000 and £250,000, HMRC first applies the main rate of 25% to your entire profit. Then it calculates a marginal relief deduction using the formula: 3/200 multiplied by (£250,000 minus your taxable profits). This relief is subtracted from the tax calculated at the main rate.
The result is a smooth transition. At £50,000, your effective rate is 19%. At £100,000, it is approximately 21.5%. At £150,000, it is around 23%. And at £250,000, you are paying the full 25%.
What catches many people out is that in the marginal band, the effective marginal rate on each additional pound of profit is actually 26.5% — higher than the main rate of 25%. This is because as your profits increase, you lose more and more of the marginal relief. So earning that next pound of profit above £50,000 costs you more in tax than earning the next pound above £250,000.
Associated Companies
If you control more than one company, the £50,000 and £250,000 thresholds are divided by the number of associated companies plus one. Two companies means the lower limit becomes £25,000 and the upper limit becomes £125,000. This prevents business owners from splitting profits across multiple companies to benefit from the small profits rate.
Dormant companies are generally excluded from the count, but it is worth checking your specific situation with your accountant. The rules around what constitutes "control" can be more nuanced than they first appear.
Practical Tips
If your profits are close to the £50,000 threshold, consider whether making additional pension contributions or timing certain expenses could keep you in the small profits band. The difference between paying 19% and entering the marginal band is meaningful.
If your profits are well above £250,000, the marginal relief rules do not affect you at all — you simply pay 25%. Focus instead on other tax planning strategies such as R&D credits, capital allowances, and the Annual Investment Allowance.
Use our corporation tax calculator to see exactly what your company owes, including marginal relief, for the 2025/26 tax year.
M. Samiuddin QUADRI is a chartered certified accountant at Gladstone & Co. Accountants, specialising in corporate tax planning for SMEs.