Marginal corporation tax

The UK business tax system has a system of marginal corporation tax with three different bands and rates, dependent on the net profits of a business. Companies with net profits of £50,000 and below pay corporation tax at 19%. Those with net profits between £50,000 and £250,000 pay tax between 19% and 25%, whilst companies with profits above £250,000 pay 25% tax. The marginal rate of tax of 26.5% is paid on profits between £50,000 and £250,000.

How does marginal rate relief work?

Marginal rate relief applies to profits between £50,000 and £250,000 and is calculated using a formula provided by HMRC. The formula is:

Standard fraction x (Upper limit – augmented profits) x amount of taxable profits ÷ augmented profits

As an illustration, assume a net profit of £60,000. The standard fraction for 2023/24 is 3 ÷ 200. Applying this to the formula gives:

3 ÷ 200 x (250,000 – 60,000) x (60,000 ÷ 60,000) = £2,850 marginal relief

There are two options for calculating the corporation tax. You can multiply the net profits of £60,000 by 25%, which equals £15,000. You then deduct the marginal relief of £2,850, resulting in a tax liability of £12,150, which is an effective tax rate of 20.25%.

Alternatively, you multiply £50,000 of the profit by 19%, which is £9,500. Multiplying the remaining profit of £10,000 by the marginal tax rate of 26.5%, results in marginal relief of £2,650. Adding both of these amounts, takes the total amount of tax owing to £12,150.

There is a much easier option to calculate the corporation tax owing, using HMRC’s calculator which is available using the link below:

Calculate Marginal Relief for Corporation Tax – Calculate Marginal Relief for Corporation Tax – GOV.UK

Other examples