Have you ever calculated your limited company's profit for the year, only to find the tax bill is higher than you expected because of the way marginal relief works? That is the reality for many UK business owners now that corporation tax rates have diverged from the flat 19% that applied before April 2023.
For the 2025/26 tax year, the structure is straightforward at the extremes. Companies with annual profits of £50,000 or less pay the small profits rate of 19%. Those with profits above £250,000 pay the main rate of 25%. Between these thresholds, marginal relief applies, creating an effective rate that climbs from 19% to 25% as profits increase. A common mistake is assuming a flat 25% applies as soon as profits exceed £50,000, but that is wrong. A software company with £180,000 profit, for example, would pay an effective rate of approximately 23.6%, not 25%.
Corporation tax is due nine months and one day after your accounting period ends. For a company with a 31 December year end, the payment deadline is 1 October the following year. Larger companies with annual tax liabilities above £10,000 (typically profits over £1.5 million) must pay in quarterly instalments, but this affects very few SMEs. What catches many directors out is the interaction with director's loan accounts and overdrawn balances, which can trigger a separate Section 455 charge at 33.75% that sits alongside your corporation tax bill.
Allowable deductions remain generous. Salaries, employer pension contributions, rent, equipment, software, professional fees, and marketing costs are all deductible. Dividends paid to shareholders are not. The Annual Investment Allowance (AIA) stays at £1 million for 2025/26, giving full relief on most plant and machinery purchases, from computers to commercial vehicles. If your business undertakes qualifying research and development, the R&D tax credit regime can reduce your corporation tax liability or generate a cash repayment, even if you are loss-making.
Where this bites hardest is in cash flow forecasting. A manufacturing SME with £200,000 profit might expect a tax bill of £38,000 at 19% but actually owes closer to £47,000 after marginal relief. That £9,000 gap can be painful if you have not planned for it. Proper timing of capital purchases, salary and dividend extraction, and pension contributions can meaningfully reduce the effective rate you pay, but only if you model the numbers before the year end rather than after.