A company making £240,000 of profit pays a higher rate of tax on its next £10,000 than a company making £5 million does.
That is not a mistake in the legislation. It is how Marginal Relief works, and it is the single most counter-intuitive feature of UK corporation tax. The relief that is supposed to soften the jump from 19% to 25% creates a band in which the marginal rate is 26.5% — higher than the main rate it is tapering towards.
Here is the formula, why it produces that number, and what it means if your profits are anywhere between £50,000 and £250,000.
What Marginal Relief actually is
Corporation tax has two rates: 19% on profits up to £50,000 and 25% on profits above £250,000. Between the two, the main rate of 25% applies — and Marginal Relief then reduces the bill.
That is the crucial mechanical point. You do not get a middle rate. You are charged at 25% on the whole profit and then given a deduction. The effective rate is an output of the calculation, not an input.
The statutory basis is section 18B of the Corporation Tax Act 2010.
The formula
Marginal Relief = (F × (U − A)) × (N ÷ A)
| Term | Meaning | Value |
|---|---|---|
| F | The standard fraction | 3/200 (0.015) |
| U | The upper limit | £250,000 |
| A | Augmented profits | Taxable total profits plus certain distributions received from unrelated, unassociated companies |
| N | Taxable total profits | Your taxable profit after all adjustments and reliefs |
For most trading companies there are no distributions to add, so A and N are the same figure and the final bracket becomes 1. The formula collapses to:
Marginal Relief = 0.015 × (£250,000 − profits)
The shortcut nobody publishes
Substitute that back into the tax calculation and something clean falls out. For a company with profits between £50,000 and £250,000, a full twelve-month accounting period, no associated companies and no distributions received from unrelated, unassociated companies:
Corporation tax = 26.5% of profits − £3,750
Test it at the boundaries. At £50,000: (0.265 × £50,000) − £3,750 = £13,250 − £3,750 = £9,500, which is exactly 19%. At £250,000: (0.265 × £250,000) − £3,750 = £66,250 − £3,750 = £62,500, which is exactly 25%.
Associated companies do not break the shortcut — they just move the constant. Divide £3,750 by the total number of associated companies including the company itself: one associate plus the company gives £1,875, two associates plus the company gives £1,250. The profit range moves with it, because the £50,000 and £250,000 limits are divided the same way.
Distributions do break it. The shortcut assumes the N ÷ A fraction is 1. Whenever augmented profits exceed taxable total profits — that is, whenever the company receives any exempt distribution from an unrelated, unassociated company — the fraction falls below 1 and the shortcut understates the tax. The worked example further down is exactly that case: the shortcut gives £22,750 against a correct £24,000.
Why the marginal rate is 26.5%
Every extra £1 of profit inside the band does two things at once:
- It is charged to corporation tax at 25% — costing 25p
- It reduces Marginal Relief by 3/200 of £1 — costing another 1.5p
25p + 1.5p = 26.5p per extra pound. The relief shrinks as your profit grows, and the rate at which it shrinks is the extra 1.5%.
The numbers
Every figure below assumes a full twelve-month period, no associated companies and no distributions received.
| Taxable profits | Marginal Relief | Corporation tax | Effective rate | Rate on the next £1 |
|---|---|---|---|---|
| £50,000 | £3,000 | £9,500 | 19.00% | 26.5% |
| £75,000 | £2,625 | £16,125 | 21.50% | 26.5% |
| £100,000 | £2,250 | £22,750 | 22.75% | 26.5% |
| £125,000 | £1,875 | £29,375 | 23.50% | 26.5% |
| £150,000 | £1,500 | £36,000 | 24.00% | 26.5% |
| £200,000 | £750 | £49,250 | 24.63% | 26.5% |
| £250,000 | £0 | £62,500 | 25.00% | 25% |
| £400,000 | Not available | £100,000 | 25.00% | 25% |
| £1,000,000 | Not available | £250,000 | 25.00% | 25% |
Read the last column. The marginal rate is 26.5% right up to £250,000, then drops to 25% and stays there for ever.
The counter-intuitive result
Two companies, same industry, same year.
Company A makes £240,000 of profit and wins a new contract worth £10,000 of additional profit. The extra £10,000 costs £2,650 in corporation tax.
Company B makes £5,000,000 of profit and wins the same contract. The extra £10,000 costs £2,500.
The smaller, less profitable company pays £150 more tax on identical additional profit. Scale that across a whole marginal band and the effect is real: a company growing from £50,000 to £250,000 of profit pays 26.5% on every pound of that growth, while its much larger competitor pays 25%.
This is what Marginal Relief is: a taper, not a discount. It hands back relief that is progressively withdrawn, and the withdrawal is itself a tax.
The practical consequence is that a £1,000 deduction is worth £265 to a company in the marginal band — more than the £250 it would be worth to a company on the full main rate, and considerably more than the £190 it is worth below £50,000. Capital allowances, pension contributions and R&D relief all buy more here than anywhere else in the system.
Augmented profits: the term that catches people out
The N ÷ A fraction only matters if A is bigger than N — which happens when your company receives distributions from unrelated, unassociated companies.
Those distributions are generally not charged to corporation tax. But they are added to your taxable total profits to give augmented profits, and augmented profits are what get tested against the limits and fed into the formula.
Worked example. A company has taxable total profits of £100,000 and receives £50,000 of dividends from an unconnected company. Augmented profits are £150,000.
- Marginal Relief = 0.015 × (£250,000 − £150,000) × (£100,000 ÷ £150,000)
- = 0.015 × £100,000 × 0.6667
- = £1,000
Corporation tax = (25% × £100,000) − £1,000 = £24,000, an effective rate of 24%.
Without the dividends, Marginal Relief would have been £2,250 and the tax £22,750. The exempt dividend income cost £1,250 in extra corporation tax — despite never being taxed itself.
If augmented profits exceed £250,000, Marginal Relief disappears entirely and the 25% main rate applies to the whole of the taxable total profits.
Who cannot claim Marginal Relief
Three exclusions:
- Non-UK resident companies
- Close investment holding companies — broadly, close companies existing to hold investments rather than carry on a trade
- Any company with augmented profits above £250,000
There are also two adjustments that quietly shrink the band:
- Associated companies divide both limits by the number of associates including the company itself. Three associates plus the company gives limits of £12,500 and £62,500
- Short accounting periods pro-rate both limits. A six-month period gets £25,000 and £125,000
Both make it far easier to fall out of the band at the top and far harder to stay under the small profits rate at the bottom.
Frequently asked questions
What is the Marginal Relief formula for corporation tax?
Marginal Relief = (F × (U − A)) × (N ÷ A), where F is the standard fraction of 3/200, U is the £250,000 upper limit, A is augmented profits and N is taxable total profits. Where there are no distributions received, A and N are the same and the formula simplifies to 0.015 × (£250,000 − profits).
Why is the effective marginal corporation tax rate 26.5%?
Because each extra £1 of profit in the band is charged at 25% and simultaneously reduces Marginal Relief by 3/200 of £1, which is 1.5p. Adding the two together gives 26.5p of tax on every additional pound of profit between £50,000 and £250,000.
Is it true that profits between £50,000 and £250,000 are taxed more heavily than profits above £250,000?
At the margin, yes. The marginal rate inside the band is 26.5%, while the marginal rate above £250,000 is the 25% main rate. A company making £240,000 pays £2,650 of tax on its next £10,000 of profit, while a company making £5 million pays £2,500 on the same amount.
Does dividend income affect my Marginal Relief?
Yes. Distributions received from unrelated, unassociated companies are added to your taxable total profits to give augmented profits, which are used both to test the £250,000 upper limit and in the formula itself. A company with £100,000 of taxable profit and £50,000 of such dividends gets £1,000 of Marginal Relief instead of £2,250.
Who cannot claim Marginal Relief?
Non-UK resident companies, close investment holding companies, and any company whose augmented profits exceed £250,000. The £50,000 and £250,000 limits are also divided by the number of associated companies including the company itself, and pro-rated for accounting periods shorter than twelve months.
Where the band actually costs money
Marginal Relief is not optional and it is not a claim you can forget to make — but the inputs to it are. Associated companies that nobody flagged, distributions that were never added to augmented profits, a short accounting period that pro-rated the limits without anyone noticing.
SmartFiling prepares and files CT600 returns on a fixed fee, including the corporation tax computation, Marginal Relief, capital allowances and HMRC submission, with a three-week turnaround from receiving your records. Every return is reviewed and signed off by an ICAEW Chartered Accountant.
