Understanding marginal corporation tax rates
The amount of Corporation Tax your company pays depends entirely on its level of taxable profits. The UK operates a tiered system designed to protect smaller businesses with a lower tax rate, while ensuring larger, more profitable companies pay the full main rate.
The three tax bands
Depending on where your business profits land, your company will be categorised into one of three distinct bands:
Profits up to £50,000 (Small Profits Rate): Your company pays a flat tax rate of 19%.
Profits over £250,000 (Main Rate): Your company pays a flat tax rate of 25% on all profits.
Profits between £50,000 and £250,000 (Marginal Relief Band): Your company is technically charged the 25% main rate, but receives a deduction called Marginal Relief. This creates a sliding scale where your effective tax rate gradually rises from 19% to 25% as your profits increase.
How marginal relief works in practice
Rather than a “cliff edge” where making £50,001 forces you to pay 25% on your entire profit, Marginal Relief smooths the transition.
Legislation dictates that this relief is calculated using a standard fraction of 3/200 (or 1.5\%$) applied to the gap between your actual profits and the upper £250,000 limit. Because of the way this maths works, every pound of profit your company earns within this middle band is effectively taxed at an exact marginal rate of 26.5% until you reach the £250,000 threshold.
A quick example:
If your company makes £100,000 in taxable profit:
Initial tax at the 25% Main Rate = £25,000
Deduct Marginal Relief: (£250,000 upper limit – £100,000 profit) X 3/200 = £2,250
Total Tax Payable: £25,000 – £2,250 = £22,750 (An overall effective rate of 22.75%)
Hidden traps: what can change your limits?
The £50,000 and £250,000 boundaries are not always set in stone. Under the legislation, these limits must be proportionately reduced in two common scenarios:
Associated Companies: If you control multiple active companies (whether commercially or through family-owned structures), the profit thresholds are divided equally between them. For example, if you own two active companies, the Small Profits threshold drops from £50,000 to £25,000 for each entity.
Shortened Accounting Periods: If your company’s financial year is shorter than 12 months (which is common during incorporation, cessation, or a restructuring alignment), the limits are reduced to match the exact number of days in that period.
Strategic Planning for Growth
Because profits in the middle band carry a steep effective tax rate of 26.5%, proactive tax planning is vital for cash flow. Simple, compliant commercial strategies – such as timing your capital allowance investments, optimising director remuneration, or utilising employer pension contributions—can effectively manage your taxable profits and keep your business in a more favourable tax position.
If you want to review your group structure, model your future tax liabilities, or ensure you are claiming the maximum relief available, the team at Moore South is here to help you plan with confidence.