If your limited company’s profits fall between £50,000 and £250,000, your corporation tax bill is not calculated at a single rate. It sits in a taper zone called marginal relief, where every extra pound of profit is effectively taxed at 26.5% — a higher rate than the 25% main rate paid by larger companies. Most directors have never heard of this, and it changes how you should think about bonuses, pensions, equipment purchases and even the timing of a second company.
This guide explains marginal relief in plain English, with worked figures at every level of the band, the traps that catch small companies out, and the planning decisions it should change.
The three corporation tax bands
Since April 2023, UK corporation tax has worked in three bands. The Autumn Budget 2026 confirmed the main rate stays capped at 25%, so these bands remain the framework for 2026/27:
- Profits up to £50,000: the small profits rate of 19%.
- Profits from £50,000 to £250,000: the main rate of 25%, reduced by marginal relief, so the average rate rises gradually from 19% towards 25%.
- Profits above £250,000: the main rate of 25%, with no relief.
The key word is average. A company with £100,000 of profit does not pay 19% on the first £50,000 and 25% on the rest in any simple sense — the relief formula produces an average rate between the two. But the marginal rate, the tax on the next pound you earn, is what matters for decisions, and inside the band it is 26.5%.
Why the marginal rate is 26.5%
Marginal relief works by starting from the 25% main-rate bill and deducting relief that shrinks as profits rise. HMRC’s formula uses the standard fraction of 3/200 (1.5%). In simplified form, for a company with no franked investment income, relief equals (£250,000 minus profit) multiplied by 3/200, deducted from the 25% bill.
The effect is that each extra pound of profit costs 25p in tax and also reduces your relief by 1.5p, giving a combined 26.5p. Once profits pass £250,000, relief has run out entirely and the marginal rate falls back to a flat 25%. The taper zone is therefore, paradoxically, the most expensive stretch of the corporation tax system — more expensive per pound than being a large company.
This is not a quirk to admire from a distance. It changes the value of everything that reduces profit. A £10,000 pension contribution or capital purchase made by a company inside the marginal band saves £2,650 of tax, not £2,500. A £10,000 bonus paid to a director in a marginal-band year is worth slightly more in tax saved than the same bonus in a main-rate year. Small difference per pound, but it reverses what most directors assume about where tax planning pays best.
Worked examples across the band
The table below uses the standard rates and the marginal relief formula, with no franked investment income and a full 12-month accounting period.
| Profit | Tax | Average rate | Tax on the next £1 |
|---|---|---|---|
| £40,000 | £7,600 | 19.0% | 19p |
| £50,000 | £9,500 | 19.0% | 26.5p from here |
| £100,000 | £22,750 | 22.75% | 26.5p |
| £150,000 | £36,000 | 24.0% | 26.5p |
| £200,000 | £49,250 | 24.625% | 26.5p |
| £250,000 | £62,500 | 25.0% | 25p from here |
| £300,000 | £75,000 | 25.0% | 25p |
Check the £100,000 row yourself: tax at 25% would be £25,000, minus marginal relief of (£250,000 minus £100,000) multiplied by 3/200 = £2,250, giving £22,750. At £150,000, relief is (£250,000 minus £150,000) multiplied by 3/200 = £1,500, so £37,500 minus £1,500 = £36,000. The arithmetic is simple once you see it; accounting software and HMRC’s calculator do it for you, but understanding it is what lets you plan.
Notice the jump at the edges. A company moving from £49,000 to £51,000 of profit does not just pay tax on the extra £2,000 — it enters a band where every further pound costs 26.5p. And a company sitting at £240,000 pays 26.5p on its last pound, while a competitor at £300,000 pays only 25p. The band punishes the middle, not the top.
The associated companies trap
This is the trap that catches the most small companies. If you control more than one company, the £50,000 and £250,000 thresholds are divided between them. The rule is designed to stop owners splitting profits across several companies to claim the 19% rate multiple times.
With one associated company, your thresholds halve to £25,000 and £125,000 each. With two associated companies, they fall to £16,667 and £83,333 each. A dormant company, a low-activity second company, or a company you set up for a side project and forgot about can therefore push your main trading company into the marginal band, or onto the full 25% rate, at far lower profits than you expect.
Associated broadly means under common control — typically one person or group owning more than 50% of the shares or voting rights. Some companies are excluded from the count, including dormant companies in certain circumstances, passive holding companies, and some overseas companies, but the exclusions are narrow and technical. Before you form a second company, ask your accountant to model the marginal relief effect on both companies. The second company may cost you more in extra tax on the first than it ever earns.
Short accounting periods
If your accounting period is shorter than 12 months, the thresholds shrink in proportion. A six-month period gives you limits of £25,000 and £125,000 instead of £50,000 and £250,000. This commonly bites in a company’s first period, or when it changes its year end. A first-year profit that looks safely inside the 19% band can land in the marginal band purely because the period was short. Again, the fix is to model it before the year end, not to discover it when the return is prepared.
What marginal relief should change in practice
Four decisions are worth revisiting if your company sits in, or near, the £50,000 to £250,000 band:
- Timing of expenses. A large equipment purchase, a pension contribution, or a director bonus is worth 26.5p in the pound of tax saved inside the band, against 25p above it and 19p below it. If an expense can legitimately fall in either of two years, the marginal-band year is the better home for it. Do not manufacture expenses you do not need — but do not leave a planned purchase in the wrong year by accident either.
- Timing of income. The same logic applies in reverse. Bringing income forward into a marginal-band year costs 26.5p per pound, so where invoicing or project completion can legitimately be timed, the year-end position matters. This is a planning consideration, not an invitation to misstate income — your accounts must reflect reality.
- Salary versus dividends. The marginal rate interacts with the salary-versus-dividend decision, because salary reduces company profit while dividends do not. A director near the top of the band may find that paying a bonus, which reduces profit and saves tax at 26.5%, beats taking the same money as a dividend. Run both routes through your accountant with your actual numbers; the right answer depends on your personal tax position too.
- Whether to form a second company. As above, a second company splits your thresholds. If the second company’s purpose is to hold property, run a side venture, or separate risk, weigh that benefit against the marginal relief cost on your main company. Sometimes the separation is still worth it. Often, owners are surprised to learn it was not.
Deadlines you still have to meet
Marginal relief changes the amount, not the timetable. Your corporation tax return (CT600) is due 12 months after the end of your accounting period, but the tax itself must be paid earlier — nine months and one day after the period end. Companies with profits over £1.5 million pay in quarterly instalments, but most small companies in the marginal band are outside that regime.
The practical point is cash flow: you owe the tax before you file the return confirming it. A company that drifts from £40,000 to £120,000 of profit across two years can face a sharply larger bill, at the higher marginal rate, months before its accountant finalises the numbers. Forecast the bill during the year, set the money aside monthly, and treat corporation tax as a running cost rather than a year-end surprise. Our guides to improving cash flow, the cash conversion cycle and working capital explain how to build that buffer into your routine. Our guide to charging interest on late payments also explains how to protect that buffer when customers pay late.
Frequently asked questions
Does marginal relief apply to my company automatically?
Yes, if your taxable profits fall between £50,000 and £250,000 (adjusted for associated companies and short periods). You do not claim it separately; it is calculated in the corporation tax return. Your software or accountant applies the formula.
Is the 26.5% rate my overall tax rate?
No. 26.5% is the marginal rate — the tax on each additional pound inside the band. Your average rate sits between 19% and 25%, rising as profits rise. At £100,000 of profit, the average rate is 22.75%, even though the next pound costs 26.5p.
What counts as an associated company?
Broadly, a company under common control with yours — typically where the same person or group controls more than 50% of the shares or voting rights. Dormant companies, passive holding companies and some overseas companies may be excluded, but get advice on your specific structure rather than assuming an exclusion applies.
Do losses affect marginal relief?
Losses carried forward reduce taxable profits, which can move you down the band or out of it entirely. Loss relief choices — carry back for an immediate refund versus carry forward against future profits — therefore interact with marginal relief, and the best choice depends on which years fall inside the band.
Has the Autumn Budget 2026 changed marginal relief?
No. The Budget confirmed the corporation tax main rate remains capped at 25% and made no change to the £50,000 and £250,000 thresholds or the 3/200 fraction. The capital allowances changes in the same Budget — first-year allowance rising to 50% from January 2027 — matter separately, because they change the timing value of equipment purchases discussed above.
The bottom line
Marginal relief is a taper, not a cliff, but it is a taper that charges you more per pound than the rate above it. If your profits sit between £50,000 and £250,000, know your average rate, know your marginal rate, check for associated companies before forming a second one, and time legitimate expenses with the 26.5% rate in mind. A ten-minute forecast with your accountant, done before the year end, is worth more than a clever return prepared after it.