What Is Corporation Tax Marginal Relief?
Corporation tax marginal relief is the mechanism that stops your company paying a flat 25% on all profits when your taxable profits sit between £50,000 and £250,000. Instead, you get a gradual increase from the 19% small profits rate up to the 25% main rate.
Think of it as a sliding scale. If your company makes £60,000 profit, you do not pay 25% on the whole lot. Marginal relief reduces the tax bill so your effective rate sits somewhere between 19% and 25%, depending exactly where your profits land.
For 2025/26 the rates are:
- Small profits rate: 19% on profits up to £50,000
- Main rate: 25% on profits above £250,000
- Marginal relief: applies between £50,000 and £250,000
These thresholds are divided by the number of associated companies in your group. If you have one associated company, the £50,000 lower limit becomes £25,000 and the £250,000 upper limit becomes £125,000. We will cover that in more detail below.
How the Marginal Relief Calculation Works
HMRC does not make you calculate the effective rate yourself. The marginal relief formula reduces the tax bill automatically when you file your CT600 corporation tax return.
Here is the formula for 2025/26:
Marginal Relief = (Upper Limit minus Augmented Profits) x (Standard Rate Fraction minus Small Profits Rate Fraction) x (Augmented Profits / Taxable Total Profits)
That looks complicated, so let us use real numbers.
Example 1: A Manchester consultancy with £92,800 taxable profits
- Upper limit: £250,000
- Augmented profits: £92,800 (assume no dividends received, so same as taxable profits)
- Standard rate fraction: 25%
- Small profits rate fraction: 19%
Marginal relief = (£250,000 minus £92,800) x (25% minus 19%) x (£92,800 / £92,800)
Marginal relief = £157,200 x 6% x 1
Marginal relief = £9,432
Corporation tax at 25% on £92,800 = £23,200
Corporation tax after marginal relief = £23,200 minus £9,432 = £13,768
Effective tax rate: 14.84%
That is below 19%. How? Because marginal relief is generous at the lower end of the band. As profits approach £250,000, the effective rate climbs towards 25%.
Example 2: A Birmingham IT consultancy with £187,400 taxable profits
- Marginal relief = (£250,000 minus £187,400) x 6% x 1
- Marginal relief = £62,600 x 6% = £3,756
- Corporation tax at 25% = £46,850
- Corporation tax after relief = £46,850 minus £3,756 = £43,094
- Effective rate: 23.0%
As you can see, the closer you get to £250,000, the closer your effective rate gets to 25%.
The Effective Rate Table
Here is how the effective corporation tax rate changes across the band for a company with no associated companies:
| Taxable Profits | Corporation Tax Due | Effective Rate |
|---|---|---|
| £50,000 | £9,500 | 19.00% |
| £75,000 | £11,750 | 15.67% |
| £100,000 | £14,500 | 14.50% |
| £125,000 | £18,500 | 14.80% |
| £150,000 | £24,500 | 16.33% |
| £175,000 | £31,750 | 18.14% |
| £200,000 | £39,500 | 19.75% |
| £225,000 | £47,750 | 21.22% |
| £250,000 | £62,500 | 25.00% |
The effective rate dips below 19% between roughly £60,000 and £130,000. That is the sweet spot where marginal relief is most valuable.
What Are Augmented Profits?
Augmented profits is a term you need to understand. It is your taxable total profits plus any dividends received from other companies that are not group companies.
For most small limited companies that do not receive dividends from other companies, augmented profits equals taxable total profits. Simple.
But if your company receives dividends from a non-group company, those dividends push up the augmented profits figure. That can reduce or eliminate your marginal relief, even if your own trading profits are below £250,000.
Example: A company in Leeds with £220,000 trading profits and £40,000 in dividends from a separate business it invested in. Augmented profits are £260,000. That is above the £250,000 upper limit, so the company pays 25% on all profits. No marginal relief.
If you receive dividends from other companies, check the augmented profits figure before assuming you qualify for marginal relief.
Associated Companies and the Thresholds
The £50,000 and £250,000 thresholds are divided by the total number of associated companies in your group. That includes your company plus any other companies under common control.
Associated companies include:
- Companies under the same control (same director-shareholders)
- Companies where one controls the other
- Companies controlled by the same person or group of people
- Companies controlled by your close family members (spouse, civil partner, children, parents, siblings)
Example: A husband and wife in Shoreditch run two limited companies. One is a marketing consultancy, the other a property holding company. They are the sole directors and shareholders of both. That is two associated companies. The thresholds become £25,000 (lower) and £125,000 (upper).
If the marketing company makes £80,000 profit, it is now within the marginal relief band (between £25k and £125k). But the upper limit is halved, so marginal relief runs out sooner.
Dormant companies count as associated unless they have been dormant since incorporation. If you have a company that does nothing, check whether HMRC treats it as dormant. If it has ever traded, it probably counts.
Our fundamentals page covers how to structure associated companies to minimise your overall tax bill.
How Marginal Relief Interacts with Dividend Planning
If you are a director-shareholder extracting profits as dividends, marginal relief changes the maths on how much profit to leave in the company.
When your company is in the marginal relief band, each extra pound of profit attracts a higher effective rate. That can make dividend extraction more attractive at certain profit levels.
Consider a company with £100,000 profit. The effective rate is 14.5%. If the director takes an extra £10,000 salary, that reduces company profit to £90,000. The effective rate drops further to about 14.2%. But the salary triggers employer NI at 13.8% and income tax on the director.
Dividends are different. Taking a £10,000 dividend from retained profits does not reduce the current year's corporation tax. But it does reduce the retained profits available for reinvestment.
The key point: marginal relief makes the effective rate lower than 19% at the lower end of the band. That means retaining profits in the company is actually more tax-efficient than extracting them, provided you need the cash for growth.
Read our guide on director pay and dividends for the full breakdown of salary versus dividend planning alongside marginal relief.
Marginal Relief and the Annual Investment Allowance
The Annual Investment Allowance (AIA) gives you 100% tax relief on most plant and machinery investments up to £1,000,000 per year. That reduces your taxable profits directly.
If your company is in the marginal relief band, investing in qualifying assets can drop your profits below £50,000. That means you pay 19% on the remaining profits, not the marginal rate.
Example: A Bristol joinery company makes £140,000 profit. It buys £95,000 of new machinery. Taxable profits drop to £45,000. The company pays 19% on £45,000 = £8,550. Without the investment, it would have paid around £20,300 (14.5% effective rate). The £95,000 investment saves £11,750 in corporation tax.
If your company is close to the £50,000 threshold, capital investment can be a powerful tool to drop into the 19% band. Just make sure the investment is commercially sensible, not just tax-driven.
Full expensing is also available for limited companies on most main-rate plant and machinery. That gives 100% relief in the first year, no upper limit. It works the same way as AIA for reducing taxable profits.
Marginal Relief and R&D Tax Credits
R&D tax credits interact with marginal relief in a specific way. If your company claims R&D relief, the enhanced expenditure reduces taxable profits. That can move you out of the marginal relief band entirely.
For accounting periods starting on or after 1 April 2024, the merged R&D scheme applies. The RDEC rate is 20% (above the line credit). For loss-making R&D intensive companies, the ERIS scheme gives a higher payable credit.
If your company is profitable and in the marginal relief band, an R&D claim could drop profits below £50,000. That saves 19% on the reduced profits, plus the RDEC credit on top.
We cover this in more detail on our R&D tax credits page.
Common Mistakes with Marginal Relief
Here are the errors we see most often from companies filing their own returns:
- Ignoring associated companies. Directors often forget to include dormant companies or companies owned by their spouse. That overstates the thresholds and understates the tax due.
- Confusing augmented profits with taxable profits. If you received dividends from non-group companies, your augmented profits are higher. That reduces or eliminates marginal relief.
- Assuming marginal relief applies automatically. It does, but only if you file the correct figures on your CT600. If you use accounting software that calculates it, double-check the augmented profits figure.
- Not planning for the effective rate. If you are at £130,000 profit, your effective rate is about 14.8%. That is lower than 19%. But if you grow to £200,000, the effective rate jumps to 19.75%. Plan your dividend extraction accordingly.
Do You Need to Worry About Marginal Relief?
If your company makes less than £50,000 profit, you pay 19%. Simple. No marginal relief to worry about.
If your company makes more than £250,000 profit, you pay 25%. Also simple. Marginal relief does not apply.
If you are in the £50,000 to £250,000 band, marginal relief is relevant. The effective rate varies significantly across that range. Understanding it helps you plan dividends, capital investments, and R&D claims more effectively.
If your company has associated companies, the thresholds shrink. That makes marginal relief relevant at much lower profit levels.
Our services page shows how we help limited companies with corporation tax planning. If your profits are in the marginal relief band, we can run the numbers and show you the most tax-efficient way to structure your affairs.
Get in touch via our contact page if you want a specific calculation for your company. We work with businesses across the UK, from London to Glasgow, and every sector in between.