Corporation Tax Marginal Relief: The Formula, Worked Examples and the 26.5% Marginal Rate

If your company's profits fall between £50,000 and £250,000, you do not pay a flat 25% corporation tax. Marginal relief, a deduction calculated with the statutory 3/200 fraction, reduces the bill so the effective rate climbs smoothly from 19% at £50,000 to 25% at £250,000. The rates, limits and fraction are identical for 2025/26 and 2026/27 (financial years FY2025 and FY2026), so the arithmetic below holds across both.

This page is the calculation in full: the formula, worked examples at several profit levels, the effective rate table, why each extra pound inside the band really costs 26.5p, the augmented profits trap, short accounting periods, and what the numbers mean for bonus, dividend and capital spending decisions. The rules that decide whether your limits are divided in the first place, the control tests, the spouse rules, the exclusions, live in our companion guide to the associated companies rules.

The Marginal Relief Formula

You never apply a blended rate directly. You charge the full 25% main rate, then deduct relief:

Marginal relief = (Upper limit minus Augmented profits) x 3/200 x (Taxable total profits / Augmented profits)

Three moving parts:

• The upper limit is £250,000, divided by the number of associated companies and time-apportioned for periods shorter than 12 months.
• Augmented profits are taxable total profits plus dividends received from companies outside your 51% group. For most owner-managed companies with no investments, augmented profits equal taxable profits and the final multiplier is 1.
• The standard fraction is 3/200 (0.015), set by statute, unchanged since April 2023 and the same for FY2025 and FY2026.

HMRC's CT600 software runs this automatically, but only from the figures you give it, so an entered associated-company count of zero or a missed dividend produces a confidently wrong answer.

Worked Examples at Real Profit Levels

All examples assume no associated companies and no dividends received unless stated, so the formula collapses to (£250,000 minus profits) x 3/200.

Example 1: a Norwich consultancy with £92,800 profit

• Tax at 25%: £23,200
• Marginal relief: (£250,000 minus £92,800) x 3/200 = £157,200 x 0.015 = £2,358
• Corporation tax: £20,842, an effective rate of 22.46%

Example 2: a Dundee IT company with £187,400 profit

• Tax at 25%: £46,850
• Marginal relief: (£250,000 minus £187,400) x 3/200 = £62,600 x 0.015 = £939
• Corporation tax: £45,911, an effective rate of 24.50%

Notice how thin the relief has become by £187,400: £939 against a £46,850 charge. The relief runs out entirely at £250,000.

Example 3: dividends received, the full three-part formula

A Cardiff agency has £180,000 of taxable profit and receives £20,000 in dividends from a minority stake in a supplier. Augmented profits are £200,000, and now the final multiplier bites:

• Tax at 25% on taxable profits: £45,000
• Marginal relief: (£250,000 minus £200,000) x 3/200 x (£180,000 / £200,000) = £50,000 x 0.015 x 0.9 = £675
• Corporation tax: £44,325

The dividends were never taxed, but they cost £675 of relief compared with the same taxable profit and no dividends, where relief would have been (£250,000 minus £180,000) x 0.015 = £1,050.

The Effective Rate at Every Point in the Band

Taxable profits	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%

The effective rate never falls below 19% and never reaches 25% until the upper limit. Every row recomputes from a single expression, which brings us to the number that matters most for planning.

Why the Marginal Rate in the Band Is 26.5%

Substitute the formula into the tax charge and simplify. For profits P in the band (with augmented profits equal to taxable profits):

Tax = 25% x P minus (£250,000 minus P) x 3/200 = 0.265 x P minus £3,750

Check it against the table: at £100,000, 0.265 x £100,000 minus £3,750 = £22,750. At £50,000 it gives £9,500, exactly 19%.

The coefficient is the point: each extra pound of profit adds 25p of main-rate tax and removes 1.5p of relief, so the true cost of a pound earned in the band is 26.5p, higher than either headline rate. It cuts both ways. A £10,000 deduction, an employer pension contribution, a capital purchase, an extra salary accrual, saves £2,650 in the band, against £1,900 for a 19% company and £2,500 for a 25% company. The band is where deductions are worth the most, which drives every planning point below.

Short Accounting Periods

The limits belong to a 12-month period and are scaled down pro rata for anything shorter. A company with a 9-month period (common in the year a company changes its accounting date) has limits of £37,500 and £187,500, and the formula uses the reduced upper limit:

• Profits for the 9 months: £87,500
• Tax at 25%: £21,875
• Marginal relief: (£187,500 minus £87,500) x 3/200 = £1,500
• Corporation tax: £20,375, an effective 23.3%

Annualised, that company is running at about £116,700 of profit, and the shortened limits tax it accordingly rather than letting a short period masquerade as a small one. Time apportionment stacks with the associated-company division: a 6-month period and one associate leaves limits of £12,500 and £62,500.

One Associated Company Changes Every Number

Where companies are associated, the £50,000 and £250,000 limits are divided by the total count before the formula runs; for a company that sits in the band both with and without the associate, halving the limits costs a flat £125,000 x 3/200 = £1,875 a year. Which companies count, the control tests, the spouse rules, the exclusions and the worked cases at two, three and five companies are all in our associated companies guide.

Bonus or Dividend in the Marginal Relief Band?

The 26.5% marginal rate changes the extraction comparison, because a bonus is deducted at 26.5% while a dividend is paid from profit that has already borne 26.5% at the margin. Take £100 of pre-tax company profit in the band, a higher-rate director, and 2026/27 rates:

• Bonus route: £100 covers a gross bonus of £86.96 plus employer NIC at 15% (£13.04); the whole £100 is deductible. The director keeps £86.96 x (1 minus 40% income tax minus 2% NIC) = £50.43.
• Dividend route: £100 bears corporation tax at the 26.5% margin, leaving £73.50 distributable; after dividend tax at the 35.75% upper rate (from 6 April 2026), the director keeps £73.50 x 0.6425 = £47.22.

In the band, the bonus edges the dividend for a higher-rate director in 2026/27, a reversal of the usual small-company answer, though the gap was narrower in 2025/26 when the dividend upper rate was 33.75%. An employer pension contribution beats both where the cash can wait: the full £100 goes in, relief lands at 26.5%, and no NIC or dividend tax arises on the way. The comparison moves with the director's own tax band and the company's exact position, so run the numbers; our guide to the salary and dividend split models the full combined position.

Timing Capital Spend to Land in the Band

Because deductions save 26.5% in the band, the year in which relief lands matters as much as the amount. A Swansea shopfitting company making £140,000 buys £95,000 of new machinery and claims the Annual Investment Allowance in full. Taxable profits fall to £45,000, under the £50,000 limit, so the bill is 19% x £45,000 = £8,550. Without the purchase it would have paid 0.265 x £140,000 minus £3,750 = £33,350. The £95,000 of spend saved £24,800, slightly over 26% of its cost, because almost every pound of the deduction landed inside the band.

The same logic applies to full expensing (companies only, uncapped, new main-rate plant) and the 40% first-year allowance on new plant bought from 1 January 2026, and to an R&D claim under the merged scheme where the work qualifies. Pull a planned purchase forward into a marginal relief year, or accelerate a claim, and each pound of deduction is worth 26.5p rather than 19p. The reverse holds too: a deduction that drags profits far below £50,000 is only saving 19% on the excess, and might be worth more next year.

Where Filers Go Wrong

• Entering zero associated companies by default. The software then uses the full limits and understates the tax. The count includes overseas companies and can include a spouse's company.
• Ignoring dividends received. Augmented profits, not taxable profits, are tested against the limits. Non-group dividends can strip relief without appearing anywhere in the tax charge.
• Using 6% (the rate gap) instead of 3/200 as the fraction. The fraction is statutory and is not the difference between 19% and 25%.
• Forgetting time apportionment. A short first or transitional period scales the limits down, and a company that looks comfortably under £250,000 can be over its apportioned upper limit.
• Planning against the effective rate instead of the marginal rate. Decisions at the margin, one more contract, one more deduction, price at 26.5%, not at the 22% to 24% blended figure on the tax computation.

For the wider picture, headline rates, payment deadlines, quarterly instalments and the reliefs that reduce the bill, see our overview of how much corporation tax you pay. And if your profits sit anywhere in the £50,000 to £250,000 band, or would but for an associated company, get in touch: at a 26.5% marginal rate, the planning usually pays for itself.