Definition
Marginal Relief is a reduction in Corporation Tax for companies with profits between £50,000 and £250,000. The company works out tax at the 25% main rate and then deducts Marginal Relief, so its overall rate rises gradually from the 19% small profits rate towards 25%. Inside that band, each extra pound of profit is effectively taxed at 26.5%, which surprises many directors.
The formula
Marginal Relief = 3/200 × (£250,000 minus augmented profits) × (taxable total profits ÷ augmented profits)
Augmented profits are taxable profits plus exempt dividends from companies outside the group. For most small trading companies the two figures are the same, so the last part of the formula equals 1.
Worked example
A company with no associated companies has taxable profits of £100,000 for a 12-month period:
- tax at 25%: £25,000
- Marginal Relief: 3/200 × £150,000 = £2,250
- Corporation Tax payable: £22,750, an effective rate of 22.75%
The same figure comes from 19% on the first £50,000 (£9,500) plus 26.5% on the next £50,000 (£13,250).
Limits and exclusions
Both limits are divided between associated companies and reduced for periods shorter than 12 months. Non-UK resident companies and close investment-holding companies cannot claim. More worked figures are in the guide to how Marginal Relief is calculated.
Related questions
- What is Marginal Relief? The reduction that phases Corporation Tax in between £50,000 and £250,000 of profit.
- How is Corporation Tax calculated? Work out taxable total profits, apply 19% or 25%, then deduct any Marginal Relief.
Related terms
-
Small profits rate
The small profits rate is the 19% rate of Corporation Tax for companies with profits of £50,000 or less in a 12-month accounting period.
Read definition -
Corporation Tax
Corporation Tax is the tax UK limited companies pay to HM Revenue and Customs (HMRC) on their taxable profits.
Read definition -
Associated companies
Companies are associated for Corporation Tax if one controls the other or both are controlled by the same person or group of persons…
Read definition -
Taxable total profits
Taxable total profits are the profits on which a UK company pays Corporation Tax for an accounting period.
Read definition
