The Marginal Rate of Corporation Tax Explained: How It Works and Why It Matters

The Rate That Catches Companies Off Guard

When the UK reintroduced a tiered Corporation Tax system in April 2023, Marginal Relief returned with it – but many company directors still don’t fully understand how it works, or why the effective cost of earning an extra pound of profit in this band can lead to a higher marginal corporate tax rate than expected.

This guide from CIGMA Accounting explains Marginal Relief clearly, with worked examples, so you can plan your company’s finances more effectively.

What Is Marginal Relief?

Marginal Relief is a mechanism that prevents a sharp jump in Corporation Tax when a company’s profits cross the £50,000 threshold into the 25% main rate band. Instead of the full 25% applying immediately, the effective tax rate rises gradually from 19% to 25% as profits move from £50,000 to £250,000.

In practical terms, this means companies with profits in the £50,001–£250,000 range pay somewhere between the two headline rates – with the exact figure depending on how high their profits are.

The Marginal Relief Formula

Corporation Tax is first calculated at the main rate of 25%. Marginal Relief is then deducted to arrive at the actual liability.

Marginal Relief Formula

Marginal Relief = (3/200) × (£250,000 – Taxable Profits)

Note: The fraction 3/200 is the standard marginal relief fraction set by HMRC for financial years 2023, 2024 and 2025.

Worked Example 1: £120,000 Profit

Step 1: Calculate CT at main rate
£120,000 × 25% = £30,000

Step 2: Calculate Marginal Relief
(3/200) × (£250,000 – £120,000) = 0.015 × £130,000 = £1,950

Step 3: Final CT liability
£30,000 – £1,950 = £28,050

Effective rate
£28,050 ÷ £120,000 = 23.4%

Worked Example 2: £75,000 Profit

Step 1: CT at main rate
£75,000 × 25% = £18,750

Step 2: Marginal Relief
(3/200) × (£250,000 – £75,000) = 0.015 × £175,000 = £2,625

Step 3: Final CT liability
£18,750 – £2,625 = £16,125

Effective rate
£16,125 ÷ £75,000 = 21.5%

The Hidden 26.5% Effective Marginal Rate

Here is the critical insight that many directors miss: whilst the headline rates are 19% and 25%, each additional pound of profit earned within the £50,000–£250,000 band is effectively taxed at 26.5%.

This happens because as profits rise, both the tax base increases AND the Marginal Relief reduces – creating a combined effect that results in a steeper rate than even the main rate of 25%.

Why This Matters for Planning

If your company has profits just below £250,000, earning an extra £1 of profit costs you 26.5p in Corporation Tax – more than the 25p you’d pay as a large company. This makes it worthwhile to consider whether you can legitimately defer income or accelerate deductions to manage your position.

Factors That Adjust the Thresholds

Associated Companies

If your company has associated companies (those under common control), both the £50,000 lower limit and £250,000 upper limit are divided by the total number of companies in the group (including yours).

For example, with two companies in a group, the limits become £25,000 and £125,000.

Short Accounting Periods

If your accounting period is less than 12 months, both thresholds are reduced proportionally. A six-month period halves the limits to £25,000 and £125,000.

Who Cannot Claim Marginal Relief?

• Non-UK resident companies
• Close Investment Holding Companies (CIHCs)
• Companies with profits above £250,000
• Companies with profits below £50,000

Tax Planning Strategies Around Marginal Relief

• Accelerate capital expenditure – claim the Annual Investment Allowance to bring taxable profits below £250,000
• Make employer pension contributions – these are allowable and directly reduce taxable profit
• Claim all available R&D Tax Credits – even small qualifying projects can generate significant deductions
• Review director salary/dividend mix – salary paid is a deductible expense for Corporation Tax purposes
• Consider the timing of income and expenditure around your year-end

Use HMRC’s Marginal Relief Calculator

HMRC provides a free online Marginal Relief calculator at gov.uk. Enter your taxable profits and accounting period details to get an accurate figure for your liability and effective rate. Alternatively, CIGMA Accounting will handle this calculation for you.

Professional Advice on Corporation Tax Marginal Rates

At Cigma Accounting, we help businesses across London understand how the marginal rate of corporation tax affects their overall tax position and decision-making. From Fulham Broadway, including Queen’s Club Area and Earls Court, many companies are unaware that crossing certain profit thresholds can change the effective tax they pay, which is why our guidance focuses on making these calculations clear and commercially relevant.

The marginal rate becomes particularly important when businesses are growing, reinvesting profits, or managing group structures, as even small increases in profit can have a disproportionate tax impact. With physical offices across London, we support companies in understanding how these rules apply in practice, helping them plan ahead with greater clarity and control.