The Marginal Relief Trap: Why Your Corporation Tax Bill Might Be Wrong
Since 1 April 2023 UK corporation tax has run on a two-rate system bridged by marginal relief. For augmented profits between £50,000 and £250,000 the effective rate tapers from 19% towards 25% — and each extra pound inside the band is taxed at 26.5%, higher than the main rate itself. The associated-company count is where the calculation most often goes wrong.
How marginal relief works
Since 1 April 2023 there have been two headline corporation tax rates: a small profits rate of 19% for companies with augmented profits up to £50,000, and a main rate of 25% for augmented profits of £250,000 or more. Marginal relief is the taper that bridges the two, reducing the headline 25% charge for companies whose profits fall between the £50,000 lower limit and the £250,000 upper limit. The standard marginal relief fraction is 3/200, equivalent to 1.5%. The counter-intuitive consequence is a hidden third rate: within the band, each additional pound of profit is taxed at an effective marginal rate of 26.5% — higher than the 25% main rate itself. That is why the band rewards forensic attention: small movements in profit or structure move real money.
The arithmetic, illustrated
Take a standalone trading company with £100,000 of taxable profit, no associated companies and a full 12-month accounting period. Charge the whole profit at the main rate: £100,000 at 25% is £25,000. Then subtract marginal relief: the upper limit of £250,000 less the £100,000 profit is £150,000, multiplied by 3/200 (0.015) gives £2,250. Corporation tax payable is £25,000 less £2,250, or £22,750 — an effective rate of 22.75%. This example is illustrative only and assumes no exempt distributions and a full-year period; it is not a substitute for a calculation on your own facts.
The associated-company trap
The £50,000 and £250,000 limits are not fixed. They are divided by the total number of companies — the company itself plus its associated companies. One associated company means two companies in total, so the limits halve to a £125,000 upper limit and a £25,000 lower limit. Two associated companies means three companies in total, so the limits are divided by three: an £83,333 upper limit and a £16,667 lower limit. Three associates divide the limits by four, to £62,500 and £12,500. The most common error we see is a miscount — missing dormant companies that still count, or companies controlled by connected persons. Every miscounted associate shifts the thresholds by tens of thousands of pounds, and the tax consequence commonly runs to £5,000 to £15,000 a year.
Augmented profits versus taxable profits
The threshold test uses augmented profits, not taxable profits. Augmented profits are the taxable total profits plus exempt distributions — broadly, dividends received from companies outside the group. A company with taxable profits of £45,000 and £10,000 of such dividends has augmented profits of £55,000, which pushes it into the marginal band even though its taxable profits sat below £50,000. The tax is then charged on the taxable total profits, but the limits are tested against augmented profits. Confusing the two produces the wrong answer.
Short accounting periods
The £50,000 and £250,000 limits assume a 12-month accounting period. For a shorter period they are reduced pro-rata, by the number of days in the period divided by 365 (Corporation Tax Act 2010, section 18D). A company that shortens its accounting period — on incorporation, on a change of year-end, or ahead of a sale — can find the limits cut without realising it, compounding any associated-company reduction.
How to check your position
Ask for your most recent CT600 corporation tax computation and divide the tax chargeable by the profits chargeable to corporation tax. If your augmented profits sit between the £50,000 and £250,000 limits — adjusted for associated companies and any short period — but the effective rate comes out at exactly 19% or exactly 25%, marginal relief may not have been applied correctly. The relief is given automatically within the corporation tax calculation on the return rather than as a separate claim, but it only produces the right figure if the associated-company count, the augmented-profits figure and the period length are correct first.
Why an annual review misses it
A once-a-year compliance review is a backward-looking, single-period exercise, and marginal relief punishes exactly that framing. The associated-company count is often taken at face value; augmented profits are overlooked; and the 26.5% band is never surfaced at the point when the timing of income, pension contributions or capital expenditure could still move profit out of it. We treat the regulatory landscape as something to review continuously rather than once at year-end — because for marginal relief, the levers are largely spent by the time the period closes.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.