Marginal relief corporation tax explained, and the rate in the middle nobody mentions
Since April 2023 there has been a band of profit taxed at an effective rate above the main rate. Most directors only find out once the year end has closed. This is how the band works and what can still be done about it.
Published 27 September 2026
6 min read
Nasir Rasheed, MAAT AATQB, Director of Nexus
Corporation tax stopped being one rate in April 2023. There is a small profits rate, a main rate, and a band in between where marginal relief applies. Here is marginal relief corporation tax explained the way I explain it on a call, with the number that actually changes decisions.
My view is simple. The headline rates are the least useful part of this. What matters to an owner is the effective cost of the next pound of profit, because that is what decides whether you buy the van this year, make the pension contribution now, or take the dividend in March.
Below: where the band starts and stops, what the middle really costs, how a second company can shrink your limits without anyone telling you, and why your year end date changes the sum.
Where marginal relief starts and stops
Marginal relief applies to company profits sitting between two limits, and the limits are tested on more than your trading profit.
Under the current GOV.UK rates, profits up to £50,000 are charged at 19 per cent. Profits above £250,000 are charged at 25 per cent. In between, you are charged the main rate and then a relief is deducted, which brings the bill back down.
The limits are tested against augmented profits. That means taxable profits plus certain distributions received from companies you are not connected to. A director who holds shares in an unrelated trading company can therefore be closer to the upper limit than the accounts suggest.
Some companies are shut out of the relief altogether. Non-UK resident companies cannot claim it, and neither can close investment holding companies. If your company stopped trading and now just holds investments, that status is worth checking rather than assuming.
The official position is set out in HMRC’s marginal relief guidance.
The band in the middle costs 26.5 per cent
Inside the band, every extra pound of profit carries more tax than the main rate, and that is the figure worth knowing.
The arithmetic is short. At the upper limit, tax is £62,500 on £250,000 of profit. At the lower limit, it is £9,500 on £50,000. The £200,000 of profit between them carries £53,000 of tax, which is 26.5 per cent.
So a company sitting comfortably in the band pays 26.5 pence of tax on the next pound of profit. Illustratively, an extra £10,000 of profit costs £2,650 in corporation tax while you are in that band.
It cuts the other way too. A deductible cost or an employer pension contribution made while you sit in the band relieves at 26.5 per cent. The same payment made when profits are already under £50,000 relieves at 19 per cent. Same cash out of the company, different tax result.
That is the number I want a director to have before the year end, not after.
Most directors learn they were sitting in the 26.5 per cent band months after the year end closed. By then the only decision left is how to pay the bill.
Associated companies shrink the limits quietly
The two limits are divided by the number of associated companies plus your own, and owners rarely see this coming.
HMRC’s own example: a company with three associated companies divides both limits by four. The lower limit becomes £12,500 and the upper limit becomes £62,500. A consultancy making £80,000 of profit goes from comfortably inside the band to straight onto the main rate.
Association is about control, not about trade. A second company you own, a company your spouse controls where there is substantial commercial interdependence, a holding company you set up years ago: any of these can count. A company that is genuinely dormant throughout the period is left out of the count, though dormant means dormant, so it is worth confirming rather than assuming.
This is one of the items I go through in the set-up review when a client joins. It takes ten minutes to establish, and it changes the tax rate applied to an entire year of profit. Most owners have never been asked the question.
Your year end date changes the sum
The limits assume a twelve month accounting period, so anything shorter is scaled down.
If you shorten a period to move your year end, the £50,000 and £250,000 limits are reduced in proportion to the length of the period. A nine month period has limits three quarters of the usual size. Profit that would have been taxed at 19 per cent in a full year can land in the band, or above it.
Periods that straddle a financial year are split into two notional periods, with profit apportioned by days and each part looked at separately. Associated company positions are also looked at separately for each part.
None of this is a reason to avoid changing a year end. It is a reason to run the numbers before you file the change rather than after. HMRC’s marginal relief calculator handles the mechanics once you know your period, your profits, and your associated company count.
What we check before a client’s year end
The relief is a calculation, so the useful work happens in the two or three months before the year end closes.
For clients here, the routine is the same every year. I forecast taxable profit and the corporation tax that goes with it, and I tell the client a month before the bill lands so the money is there and the decision is theirs.
Alongside that, we look at:
- whether profit is sitting inside the band, and what the next pound of profit is costing
- the associated company count, including anything a spouse or business partner controls
- employer pension contributions and capital purchases, and whether the timing lands in the band or below it
- the salary and dividend position for the year, since salary is a company deduction and dividends are not
That last point is where most of the planning lives. Our guide on salary vs dividends for a company director goes through how the two interact.
Common questions
Do I have to claim marginal relief on the CT600 myself?
The relief is worked into the corporation tax computation rather than claimed as a separate election. Whoever prepares your CT600 applies it once profits, the period length, and the associated company count are known. The part that needs your input is the associated company question, because HMRC expects an accurate figure and your accountant cannot see companies you have not mentioned.
Does a dormant company count as an associated company?
A company that is dormant throughout the accounting period is generally left out of the count. The test is about the whole period, so a company that traded for part of it can still count. If you hold a shell company you have stopped using, confirm its filing status at Companies House before relying on it being ignored.
Is it worth keeping profits under £50,000 on purpose?
Rarely. Holding back profitable work to sit under the small profits limit costs you more in lost margin than it saves in tax. The sensible move is to know you are in the band, then decide whether spending that was coming anyway, such as a pension contribution or equipment, is better made this year or next.
Do dividends I receive from other companies affect the limits?
They can. The limits are tested against augmented profits, which include certain distributions from companies you are not connected to. Shares held in an unrelated trading company can therefore push you nearer the upper limit even though the dividend income is not taxed again in your company. Tell your accountant about any shareholdings the company holds.
Our take
Marginal relief corporation tax explained properly comes down to one figure: what the next pound of profit costs you this year. For a company inside the band, that is 26.5 per cent, and it changes how you think about pension contributions, equipment, and the timing of profit.
The relief itself is automatic in the calculation. The value is in knowing where you sit before the year closes, and in checking the associated company count, which is the item that catches people out most often.
If you are an established limited company and nobody has shown you your corporation tax position before the year end, that is the work I do for every client here, included in the monthly fee. Nexus takes three new clients a month, so there is a wait.