If your limited company earns both trading profits and investment income, the corporation tax calculation is not as straightforward as applying a single rate to the total. The two income streams are treated differently for tax purposes, and the distinction affects which rate of corporation tax applies, whether marginal relief is available, and how you complete the CT600 return.
This guide explains the mechanics using the 2025/26 tax year rates. It covers the core calculation, the impact of investment income on marginal relief, and the practical steps for filing. As ICAEW qualified accountants, we work with companies across the UK that mix trading activity with property letting, interest income, or dividend receipts. The principles here apply to most situations, but your specific circumstances may require tailored advice.
Why the Distinction Between Trading and Investment Income Matters
Corporation tax is charged on a company's total profits. Total profits means chargeable gains plus income from all sources. But the corporation tax rates and reliefs are structured around the company's augmented profits, which is a specific calculation defined in tax law.
Augmented profits are your company's total profits plus any dividends received from other UK companies (excluding most intra-group dividends). This figure determines which corporation tax rate applies and whether marginal relief is due. The key point: investment income increases your augmented profits, which can push you into the main 25% rate even if your trading profits alone would have qualified for the 19% small profits rate.
This catches many directors out. A company with £45,000 of trading profit and £20,000 of bank interest might assume it pays 19% on the lot. In reality, the augmented profits of £65,000 place it in the marginal relief band, meaning an effective rate higher than 19% on the trading profits and the full 25% on the interest.
Corporation Tax Rates for 2025/26
The rates for accounting periods starting on or after 1 April 2023 are now settled. For 2025/26 they are:
- Small profits rate: 19% on profits up to £50,000
- Main rate: 25% on profits above £250,000
- Marginal relief: applies where augmented profits fall between £50,000 and £250,000
The lower and upper limits are divided by the number of associated companies. If you have one associated company, the limits halve to £25,000 and £125,000. If you have two associated companies, they divide by three, and so on. This is a common trap for groups and for companies with dormant subsidiaries.
The Marginal Relief Calculation Step by Step
Marginal relief gradually withdraws the benefit of the 19% rate as profits increase from £50,000 to £250,000. The formula is set by legislation and looks like this:
Marginal relief = (Upper limit - Augmented profits) x (Standard fraction) x (Total profits / Augmented profits)
The standard fraction for 2025/26 is 3/200 (0.015). The upper limit is £250,000 (or the relevant proportion with associated companies).
Let's work through a real example.
Worked Example: Camden Consultancy Ltd
Camden Consultancy Ltd is a small digital agency based in Camden, London. It has one director and no associated companies. For the year ended 31 March 2026:
- Trading profits: £83,400
- Bank interest received: £9,200
- Dividends received from a UK supplier (unconnected): £2,100
- No chargeable gains
Step 1: Calculate total profits
Total profits = Trading profits (£83,400) + Bank interest (£9,200) = £92,600
Dividends from UK companies are not included in total profits for tax purposes (they are franked investment income). But they are included in augmented profits.
Step 2: Calculate augmented profits
Augmented profits = Total profits (£92,600) + Franked investment income (£2,100) = £94,700
Step 3: Determine the applicable rate
Augmented profits of £94,700 fall between £50,000 and £250,000. Marginal relief applies.
Step 4: Apply the marginal relief formula
Marginal relief = (£250,000 - £94,700) x 3/200 x (£92,600 / £94,700)
= £155,300 x 0.015 x 0.9778
= £2,329.50 x 0.9778
= £2,278 (rounded)
Step 5: Calculate corporation tax at 25% on total profits
Corporation tax at 25% = £92,600 x 25% = £23,150
Step 6: Deduct marginal relief
Corporation tax payable = £23,150 - £2,278 = £20,872
Effective rate check: £20,872 / £92,600 = 22.54%
The effective rate sits between 19% and 25%, reflecting the mixed income. The interest income is effectively taxed at 25% (because it is non-trading income and does not benefit from marginal relief in the same way), while the trading profits receive partial relief.
How Investment Income Affects Marginal Relief
Investment income matters because it increases augmented profits without increasing the amount of trading profits that qualify for relief. In the formula above, the fraction (Total profits / Augmented profits) adjusts the relief downwards when there is franked investment income. The practical effect is that investment income is always taxed at the full 25% rate once augmented profits exceed the lower limit, even if the company's overall effective rate is lower.
This creates a clear planning point. If your company holds significant cash reserves earning interest, or if it owns investment property, the corporation tax on that income will be higher than the headline 19% small profits rate would suggest. The same applies to dividend income from unconnected companies.
One common scenario is a trading company that has built up retained profits and deposited them in a business savings account. At current interest rates (5% or more on some accounts), the interest can easily push augmented profits over £50,000, triggering marginal relief and increasing the overall tax bill.
Non-Trading Loan Relationships and Other Investment Income
Interest income is taxed under the loan relationship rules. Most bank interest is classified as non-trading loan relationship income. It is included in total profits and taxed at the corporation tax rate that applies to the company's augmented profits. There is no special rate for non-trading income. It all goes into the same pot.
Other types of investment income include:
- Rental income from UK property (non-trading if the company is not a property developer)
- Dividends from UK companies (franked investment income, included in augmented profits but not total profits)
- Dividends from overseas companies (unfranked, included in total profits and augmented profits)
- Gains on the disposal of investments (chargeable gains, included in total profits and augmented profits)
Each type has its own computational rules, but they all feed into the same corporation tax calculation. The key takeaway is that the corporation tax computation for a company with mixed income is a single computation, not separate calculations for each income stream.
Filing the CT600 With Mixed Income
The CT600 corporation tax return has specific boxes for different income types. You do not simply enter a single profit figure. The return requires you to split out:
- Trading profits (box 1)
- Non-trading loan relationship income (box 5, typically bank interest)
- Property income (box 6)
- Chargeable gains (box 8)
- Franked investment income (box 10)
- Other income (various boxes)
The computation then flows through to the tax calculation section where the marginal relief is computed automatically if you are using HMRC's online filing or commercial software. But you must enter the correct figures in the right boxes. A common error is to lump all income into the trading profits box, which distorts the marginal relief calculation and can lead to HMRC enquiries.
If you prepare the return manually or use spreadsheet-based filing, you need to apply the marginal relief formula yourself. Most accounting software like Xero, FreeAgent, and Sage 50 handles this automatically, provided the income is coded to the correct nominal accounts.
Planning to Reduce the Impact of Investment Income on Corporation Tax
There are legitimate ways to structure your company's affairs to minimise the corporation tax cost of investment income. None are aggressive avoidance. They are sensible commercial arrangements.
Pay down debt before building cash reserves. If your company has borrowings, using surplus cash to repay debt reduces interest income and saves interest expense. The net effect on profits may be neutral, but the corporation tax rate on the saved interest is lower because it reduces trading profits rather than generating non-trading income.
Invest in the business. Capital expenditure on plant and machinery qualifies for Annual Investment Allowance (AIA) of up to £1,000,000 per year. Spending surplus cash on qualifying assets reduces trading profits and avoids the interest income problem entirely. Full Expensing is also available for limited companies on most main-rate plant and machinery.
Extract surplus cash as dividends. If the company has more cash than it needs, paying a dividend to shareholders removes the cash from the company. The shareholder pays dividend tax at their personal rate (8.75%, 33.75%, or 39.35% in 2025/26), but the company avoids corporation tax on the interest that cash would have generated. Whether this is efficient depends on the shareholder's personal tax position.
Use a separate investment company. In some cases, holding investment assets in a separate company can isolate the investment income and keep the trading company within the small profits rate. But this adds complexity, administrative cost, and the associated company rules may link the two companies anyway. Professional advice is essential before pursuing this route.
What About Property Investment Companies?
If your company's primary activity is property investment rather than trading, the same corporation tax rates apply. The distinction between trading and investment income matters for other tax purposes (such as whether the property is stock in trade or a fixed asset), but for corporation tax rate purposes, all income is aggregated into total profits and augmented profits.
A company that holds a single rental property and has no other income will pay corporation tax at 19% if its augmented profits are below £50,000, or 25% if above £250,000, with marginal relief in between. The rental income is not treated differently from trading income for rate purposes.
Common Mistakes Directors Make
Mistake 1: Assuming the small profits rate applies to trading profits only. As the worked example shows, investment income pushes up augmented profits and can withdraw the 19% rate entirely.
Mistake 2: Forgetting to include franked investment income in augmented profits. Dividends from UK companies are not taxable, but they still count in the augmented profits calculation for marginal relief purposes.
Mistake 3: Ignoring associated companies. If you have a dormant subsidiary or a second trading company, the profit limits are divided. A dormant company with no activity still counts as an associated company for corporation tax purposes unless it meets the de minimis exemption (no assets, no income, no transactions).
Mistake 4: Mis-coding interest income in the accounts. If bank interest is posted to a trading income account, the software may not recognise it as non-trading loan relationship income, leading to an incorrect CT600.
When to Get Professional Help
If your company earns investment income that is more than a few thousand pounds, or if you have multiple associated companies, the corporation tax calculation becomes complex quickly. Marginal relief is a mathematical formula, but applying it correctly requires accurate profit computations and a clear understanding of which income goes where.
Our ICAEW qualified team at Holloway Davies handles mixed income computations regularly. We can review your draft CT600, check the marginal relief calculation, and advise on structuring to minimise your tax bill. If you are unsure whether your company's investment income is being taxed correctly, get in touch for a consultation.
For a broader overview of how corporation tax works for different company structures, see our corporation tax blog section. If you are considering incorporating a new business, our incorporation guide covers the tax implications of moving from sole trader to limited company, including how retained profits and investment income are treated.