Corporation Tax marginal relief is a reduction available to UK companies with taxable profits falling within a £200,000 band, tapering the effective rate gradually from 19% toward the 25% main rate. Without it, crossing the lower threshold by a single pound would trigger the full main rate on all profits, this relief is specifically designed to prevent.
This guide explains who qualifies, how the thresholds change with associated companies, how to calculate the relief correctly, and how to use it for tax planning before your year-end.
What Is Corporation Tax Marginal Relief?
Taxable Profits | Corporation Tax Rate |
|---|---|
Up to £50,000 | 19% (Small Profits Rate) |
£50,001 to £250,000 | 25% main rate less marginal relief |
Over £250,000 | 25% (Main Rate) |
The marginal relief exists to prevent a cliff edge. Without it, crossing the lower threshold by £1 would trigger the full main rate on all profits. Marginal relief spreads that rate increase gradually across the band instead.
Does Your Company Qualifies for Marginal Relief?
Your company qualifies if its taxable profits fall within the marginal band in an accounting period from 1 April 2023. The standard thresholds apply to a 12-month accounting period with no associated companies. Both factors can reduce the qualifying range and must be confirmed before filing.
Who Cannot Claim Marginal Relief
You cannot claim the relief if:
- Your company is non-UK resident
- Your company is a close investment holding company. Broadly, one whose principal activity is holding investments rather than trading. Property investment companies can fall into this category and should confirm their status before filing
- Your augmented profits, including qualifying exempt distributions from unrelated non-group companies, exceed the upper limit
What Is the Marginal Relief Formula?
HMRC calculates marginal relief using the following formula:
HMRC calculates marginal relief using the following formula: Marginal Relief = (Upper Limit − Augmented Profits) × (Basic Profits ÷ Augmented Profits) × 3/200
What Are Augmented Profits?
Augmented profits are taxable profits plus any qualifying exempt distributions such as dividends received from non-associated UK companies. For most owner-managed businesses these are the same figure. Where they differ, the dividends are added to profits solely to determine which threshold band applies. They carry no additional corporation tax charge, and the full formula must be used.
Where Does the 3/200 Fraction Come From?
The fraction is derived directly from the tax rates and profit thresholds:
- Tax on £50,000 at 19% = £9,500
- Tax on £250,000 at 25% = £62,500
- Difference in tax = £53,000
- Spread across the £200,000 profit band = an effective marginal rate of 26.5%
- That is 1.5% above the 25% main rate and 1.5% expressed as a fraction is 3/200
This derivation also explains why the effective marginal rate within the band is higher than the main rate itself.
How to Calculate Corporation Tax Marginal Relief?
To calculate your corporation tax liability where marginal relief applies, follow these three steps.
Step 1: Calculate corporation tax on your taxable profits at the 25% main rate
Step 2: Calculate marginal relief (formula mentioned above)
Step 3: Deduct the marginal relief from the tax calculated at Step 1. This is your corporation tax liability
Example 1: Taxable Profits of £70,000
Particulars | Calculation | Result |
|---|---|---|
Corporation Tax liability before Marginal Relief | £70,000 × 25% | £17,500 |
Marginal Relief | (£250,000 − £70,000) × 3/200 | £2,700 |
Corporation Tax liability after Marginal Relief | £17,500 − £2,700 | £14,800 |
Effective rate | 21.1% |
Example 2: Taxable Profits of £220,000
Particulars | Calculation | Result |
|---|---|---|
Corporation Tax liability before Marginal Relief | £220,000 × 25% | £55,000 |
Marginal Relief | (£250,000 − £220,000) × 3/200 | £450 |
Corporation Tax liability after Marginal Relief | £55,000 − £450 | £54,550 |
Effective rate | 24.8% |
The closer your profits are to £250,000, the less relief remains, falling from £2,700 at £70,000 to just £450 at £220,000 and disappearing entirely at the upper limit.
HMRC provides a free marginal relief calculator to verify your figures before filing.
An Alternative Way to Look at Marginal Relief: The Banded Method
Here is a second way to arrive at the same liability, treating profits in two separate bands rather than applying a single rate and deducting relief.
Step 1: Tax the first £50,000 at 19%.
Step 2: Tax every pound above £50,000 up to your actual profit level at 26.5%.
Step 3: Add the two figures together.
Using the same £120,000 profit figure:
Particulars | Calculation | Result |
|---|---|---|
First £50,000 at 19% | £50,000 × 19% | £9,500 |
Next £70,000 at 26.5% | £70,000 × 26.5% | £18,550 |
Corporation Tax liability | £9,500 + £18,550 | £28,050 |
The same liability £28,050 arrived at from a different direction. Every pound above £50,000 within the band costs 26.5p in corporation tax more than the 25p paid on each pound above £250,000.
How Do Short Accounting Periods Affect the Thresholds?
If your accounting period is shorter than 12 months, both thresholds are reduced proportionately using this formula:
Adjusted threshold = Standard threshold × (days in period ÷ 365)
Accounting Period | Lower Limit | Upper Limit |
|---|---|---|
12 months | £50,000 | £250,000 |
9 months | £37,500 | £187,500 |
6 months | £25,000 | £125,000 |
The marginal relief remains available in a short period. It simply applies to a narrower profit range. This most commonly affects companies in their first trading period or where the accounting date has been changed.
How Do Associated Companies Affect the Thresholds?
Both limits are divided by the total number of associated companies, including your own. The impact on qualifying thresholds is material and catches many owner-managed businesses by surprise.
Number of Associated Companies (inc. yours) | Lower Limit | Upper Limit |
|---|---|---|
1 (standalone) | £50,000 | £250,000 |
2 (you + 1 associate) | £25,000 | £125,000 |
3 (you + 2 associates) | £16,667 | £83,333 |
4 (you + 3 associates) | £12,500 | £62,500 |
A company with three associates has an upper limit of just £62,500. Profits above that are taxed at the full main rate with no relief available.
What Counts as an Associated Company?
A company is associated with another where one controls the other, or both are under the control of the same person or group of persons. Control is determined by shareholding, voting rights, or rights to distributable income. Where connected family members hold rights across multiple companies, those rights can be taken into account particularly where commercial interdependence exists between the businesses. Dormant companies are generally excluded from the count.
⚠️ The HMRC Enquiry Risk
HMRC has been writing to companies it suspects have underdeclared associated companies, asking them to amend their returns, make a voluntary disclosure, or confirm their position in writing. If your return shows zero associated companies but a director controls other active limited companies, your return may be queried. An incorrect associated company count is one of the most common and most avoidable reasons for a corporation tax enquiry.
How to Claim Marginal Relief on Your CT600
There is no standalone claim form. The relief is declared on your CT600 Company Tax Return. The return asks for the number of associated companies and your augmented profits figure. The software used to prepare the return calculates the relief automatically from those inputs.
The most common errors HMRC sees are:
- Leaving the associated companies count blank or setting it to zero when it should be higher
- Treating qualifying exempt distributions incorrectly, which inflates or deflates the augmented profits figure
- Applying the standard thresholds when the accounting period is less than 12 months
- Assuming the same eligibility applies year after year without reviewing it
Eligibility should be checked every year. A new company under common control, a shift in profit levels, or a shortened accounting period can all change whether the relief applies and by how much.
Tax Planning Around the Marginal Relief Band
Within the marginal relief band, each pound of taxable profit costs more in tax than it would above £250,000. The following strategies address that directly.
Capital Allowances and the Annual Investment Allowance
If your projected profits are sitting above £250,000, the first question worth asking is whether any capital expenditure planned for the next few months could be brought forward. The Annual Investment Allowance allows companies to deduct up to £1 million of qualifying capital expenditure in the year it is incurred. Meaning a purchase made before your year-end reduces taxable profits immediately, not gradually over several years.
A company tracking toward £270,000 of profits that brings forward £30,000 of qualifying equipment expenditure before year-end does not simply save tax at 25%. It moves into the marginal relief band, recovers £1,500 of marginal relief, and reduces its effective rate from 25% to 24.58%. The expenditure was going to happen; the timing is the only variable.
Employer Pension Contributions
For a director whose company sits within the marginal relief band, pension contributions are worth looking at before any other variable because the tax relief is higher here than anywhere else in the rate structure. Each pound of employer contribution reduces taxable profits pound for pound, attracts no National Insurance, and within this band saves 26.5p in corporation tax rather than the 25p saved above the upper limit.
A company with taxable profits of £175,000 making a £30,000 employer pension contribution before year-end reduces taxable profits to £145,000. Marginal relief increases from £1,125 to £1,575 and the total corporation tax saving is £8,445. The contribution must be wholly and exclusively for the purposes of the business. HMRC can challenge amounts that appear disproportionate to the director's remuneration or role but for a working director drawing a commercial salary, this might be straightforward to satisfy.
Timing of Income and Expenditure
Profit levels are rarely fixed until the year-end has passed. Where a company's profits are tracking close to either threshold, the £50,000 lower limit or the £250,000 upper limit. The timing of invoicing, expenses, and discretionary payments becomes a tax decision as much as a commercial one.
Accelerating a genuine expense into the current period or deferring income that has not yet fallen due can determine whether the small profits rate, marginal relief, or the full main rate applies. The distinction that matters here is between timing decisions that reflect genuine commercial activity and adjustments made purely to suppress profit. The former is standard planning. The latter falls outside it.
Associated Company Structure
This is the area where the most avoidable tax overcharges occur. Where a director controls multiple companies, the associated company rules divide the marginal relief thresholds often pushing companies above the upper limit at a much lower profit level. A company that appears to sit comfortably within the band may, on closer inspection, have an upper limit of £62,500 or £83,333 once associated companies are counted correctly.
Before concluding that a company is or is not eligible for marginal relief, it is worth confirming the associated company count including whether any dormant companies should be included or excluded, and whether commercial interdependence between related entities affects the position. Structural changes to address this require careful handling and independent advice before implementation.
Not sure whether your company is claiming the right amount of marginal relief?
UK Property Accountants can review your position, check your associated company count, and identify planning opportunities before your year-end.
FAQs
No. It is declared on your CT600 Company Tax Return. There is no separate claim form. You enter the number of associated companies and your augmented profits, and the return calculates the relief from those figures.
Losses carried forward reduce taxable profits before marginal relief is calculated. If carried-forward losses reduce profits below £50,000, the small profits rate applies instead. If they reduce profits to a figure within the band, marginal relief applies to that post-loss figure. The relief is always calculated on taxable profits after loss relief has been applied.
Yes. HMRC allows companies to amend a CT600 within 12 months of the original filing deadline. If your return was filed with an incorrect associated company count or augmented profits figure, an amendment can correct the relief and generate a repayment where tax has been overpaid. Beyond the 12-month window, an overpayment relief claim may still be possible. A tax adviser can confirm the options available in your specific situation.
Yes. The marginal relief fraction of 3/200 and the profit thresholds of £50,000 and £250,000 are unchanged for financial years 2023, 2024, and 2025. The thresholds have been frozen since their reintroduction in April 2023. With inflation pushing profits upward, more companies are entering the marginal band each year without any change in their underlying growth making the relief increasingly relevant for owner-managed businesses.
No, restricting genuine business growth to remain within the band is rarely the right approach. The effective rate rises gradually through the band, meaning you are never worse off earning more profit. The more useful question is whether legitimate reliefs such as pension contributions, capital allowances, or timing of expenditure can reduce taxable profits before your year-end.
It can. Where a husband and wife each own separate limited companies, those companies may be treated as associated if common control exists which is determined by shareholding, voting rights, or rights to distributable income. HMRC can also take into account rights held by connected persons where there is commercial interdependence between the businesses.
You do not need to make a separate claim for Marginal Relief. If your company qualifies, it is worked out as part of the Corporation Tax calculation. You still need to make sure the Company Tax Return is completed correctly, especially if the company has associated companies or a shorter accounting period.
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