Corporation Tax: Small Profits Rate + Marginal Relief (2026-27)

If your limited company makes a profit, you'll pay Corporation Tax—but the rate you pay in 2026-27 depends on how much profit you make. Companies with profits up to £50,000 pay 19%, while those over £250,000 pay 25%. In between, a system called Marginal Relief tapers the rate upward smoothly, so you never face a sudden cliff-edge jump. Crucially, the effective rate in that middle band is actually 26.5%—higher than the main rate—because the taper is designed to claw back the benefit of the lower rate as profits rise. This guide explains how it all works, with real examples and the exact calculations you need.

The two-rate structure: how it works

Since April 2023, the UK has operated a two-tier Corporation Tax system. Before that, there was a flat 19% rate for all companies, but the government reintroduced a higher rate for larger profits to raise revenue.

Here's the headline structure for 2026-27:

• Small Profits Rate (SPR): 19% on profits up to £50,000
• Main Rate: 25% on profits above £250,000
• Marginal Relief band: Between £50,000 and £250,000, you pay an effective rate that tapers upward

The £50,000 and £250,000 figures are called the "lower limit" and "upper limit" respectively. If your company's profits fall between them, you calculate tax at 25% but then claim Marginal Relief to reduce the bill.

What counts as "profits"?

For Corporation Tax purposes, "profits" means your company's taxable total profits—broadly, your trading profit plus any investment income, property income, and chargeable gains, minus allowable deductions and reliefs.

Augmented profits is a slightly wider concept: it's your taxable profits plus any dividends received from non-group companies (called "franked investment income"). This matters because the thresholds are tested against augmented profits, not just taxable profits. The idea is to stop companies parking profits in subsidiaries to stay under the limits artificially.

In practice, if your company doesn't receive dividends from other companies outside your group, augmented profits = taxable profits. Most small companies fall into this category.

Calculating your Corporation Tax bill: the three scenarios

Scenario 1: Profits up to £50,000 (Small Profits Rate)

If your company's augmented profits are £50,000 or less, you simply pay 19% on your taxable profits. No further calculation needed.

Example: Green Ltd
Taxable profits: £40,000
Augmented profits: £40,000 (no dividends)
Corporation Tax: £40,000 × 19% = £7,600

Scenario 2: Profits over £250,000 (Main Rate)

If augmented profits exceed £250,000, you pay the 25% main rate on all your taxable profits. Again, straightforward.

Example: Blue plc
Taxable profits: £500,000
Augmented profits: £500,000
Corporation Tax: £500,000 × 25% = £125,000

Scenario 3: Profits between £50,000 and £250,000 (Marginal Relief)

This is where it gets more interesting. Your company pays 25% on taxable profits, then claims Marginal Relief to reduce the bill. The relief ensures the effective rate rises smoothly from 19% to 25% as profits increase.

The Marginal Relief formula is:

(Upper Limit − Augmented Profits) × (Taxable Profits ÷ Augmented Profits) × 3/200

Where:

• Upper Limit = £250,000
• Augmented Profits = taxable profits + non-group dividends
• Taxable Profits = the figure you're paying tax on
• 3/200 = the marginal relief fraction (0.015)

Step-by-step calculation:

1. Calculate tax at 25%: Taxable Profits × 0.25
2. Calculate Marginal Relief using the formula above
3. Subtract the relief from the tax: Final bill = (Taxable Profits × 0.25) − Marginal Relief

Example: Red Ltd
Taxable profits: £100,000
Augmented profits: £100,000 (no dividends)

Tax at 25%: £100,000 × 0.25 = £25,000

Marginal Relief:
(£250,000 − £100,000) × (£100,000 ÷ £100,000) × 3/200
= £150,000 × 1 × 0.015
= £2,250

Final Corporation Tax: £25,000 − £2,250 = £22,750

Effective rate: £22,750 ÷ £100,000 = 22.75%

Notice the effective rate is higher than 19% but lower than 25%—exactly as intended.

Example: Amber Ltd
Taxable profits: £180,000
Augmented profits: £180,000

Tax at 25%: £180,000 × 0.25 = £45,000

Marginal Relief:
(£250,000 − £180,000) × (£180,000 ÷ £180,000) × 3/200
= £70,000 × 1 × 0.015
= £1,050

Final Corporation Tax: £45,000 − £1,050 = £43,950

Effective rate: £43,950 ÷ £180,000 = 24.42%

As profits rise toward £250,000, the relief shrinks and the effective rate approaches 25%.

The 26.5% effective marginal rate: what it means

Here's something that surprises many business owners: the effective marginal rate of tax on profits between £50,000 and £250,000 is 26.5%, not 25%.

What does "marginal rate" mean? It's the rate of tax you pay on the next pound of profit. If you earn one more pound in the Marginal Relief band, you pay 26.5p in extra tax.

Why is it higher than the main rate? Because in this band, you're not just paying 25% on the extra pound—you're also losing some of your Marginal Relief. The 3/200 fraction is calibrated so that the combined effect is 26.5%.

Mathematically: 25% + (3/200 × 100) = 25% + 1.5% = 26.5%.

Practical impact:
If your profits are hovering around £100,000–£200,000, every additional £10,000 of profit costs you £2,650 in Corporation Tax, not £2,500. This can affect decisions about timing income, making pension contributions, or claiming capital allowances.

Example: comparing two profit levels
Company A: £100,000 profit → tax £22,750
Company B: £110,000 profit → tax £25,400
Extra profit: £10,000
Extra tax: £2,650
Marginal rate: 26.5%

Once profits exceed £250,000, the marginal rate drops back to 25% because you're out of the taper band.

Associated companies: dividing the limits

If your company is part of a group with other companies, the £50,000 and £250,000 limits are divided by the number of "associated companies" (plus your own company).

What is an associated company?
Two companies are associated if one controls the other, or both are under common control by the same person or group of people. Control generally means owning more than 50% of the shares, voting rights, or rights to profits/assets [CTA 2010 s. 25].

Dormant companies and those not carrying on a trade are usually excluded from the count.

Example: associated companies
You own 100% of Company X and 100% of Company Y. Both are trading.
Number of associated companies: 2
Lower limit: £50,000 ÷ 2 = £25,000 each
Upper limit: £250,000 ÷ 2 = £125,000 each

If Company X has profits of £60,000, it's now in the Marginal Relief band (above £25,000, below £125,000), even though it would have qualified for the Small Profits Rate if it were standalone.

Part-year associations:
If companies are only associated for part of the accounting period, you apportion the limits by the number of days. HMRC provides detailed guidance on this in the Corporation Tax manual [CTM03500 onwards].

When augmented profits differ from taxable profits

Most small companies won't need to worry about this, but if your company receives dividends from non-group companies, you must add them to taxable profits to get augmented profits.

Example: dividends from non-group companies
Taxable profits: £80,000
Dividends from a non-group company: £30,000
Augmented profits: £80,000 + £30,000 = £110,000

You test the £110,000 against the thresholds (so you're in the Marginal Relief band), but you only pay tax on the £80,000 taxable profits.

Tax at 25%: £80,000 × 0.25 = £20,000

Marginal Relief:
(£250,000 − £110,000) × (£80,000 ÷ £110,000) × 3/200
= £140,000 × 0.7273 × 0.015
= £1,527

Final tax: £20,000 − £1,527 = £18,473

Dividends from companies within your 51% group are ignored—they don't inflate augmented profits.

Accounting periods and apportionment

If your company's accounting period is shorter or longer than 12 months, you must apportion the £50,000 and £250,000 limits.

Example: 9-month accounting period
Lower limit: £50,000 × (9 ÷ 12) = £37,500
Upper limit: £250,000 × (9 ÷ 12) = £187,500

If profits for the 9 months are £60,000, you're in the Marginal Relief band.

Accounting periods longer than 12 months are rare (usually only in the first period after incorporation), but the same principle applies: scale the limits proportionately.

Common mistakes

1. Forgetting about associated companies
Many owner-managers don't realise that having multiple companies under common control divides the thresholds. If you own two companies, each gets only £25,000 small profits limit, not £50,000.

2. Assuming 25% is the highest rate
The 26.5% effective marginal rate in the £50,000–£250,000 band catches people out. If you're planning tax-efficient profit extraction, remember that extra profit in this band is taxed more heavily than profit above £250,000.

3. Using old rates or thresholds
Pre-April 2023, Corporation Tax was a flat 19%. Some older software or templates may still reference this. Always check you're using current-year figures.

4. Ignoring non-group dividends
If your company invests in other companies outside your group, dividends from them inflate augmented profits and can push you into a higher band, even though you don't pay Corporation Tax on the dividends themselves.

5. Not claiming Marginal Relief
HMRC systems usually calculate this automatically if you file digitally, but if you're in the taper band and preparing your own return, make sure you claim the relief—it's not optional, it's part of the calculation.

How to report and pay

You report Corporation Tax via your Company Tax Return (CT600), usually filed online through HMRC's portal or commercial software. The return is due 12 months after the end of your accounting period, but payment is due 9 months and one day after the period ends [TMA 1970 s. 59D; FA 1998 Sch. 18].

If your profits exceed £1.5 million, you must pay Corporation Tax in quarterly instalments, but that's beyond the scope of most small and medium companies.

HMRC's software will calculate Marginal Relief for you if you enter your figures correctly, but it's worth understanding the mechanics so you can plan ahead.

Planning tips

• Timing of income and expenses: If you're near a threshold, consider whether deferring income or accelerating expenses (like capital allowances or pension contributions) could drop you into a lower band.
• Profit extraction strategy: For owner-managers, the interaction between Corporation Tax, dividend tax, and Income Tax is complex. The 26.5% marginal rate can make salary (with Employers' NI at 13.8%) look relatively less attractive, but dividend tax rates and personal allowances matter too.
• Group structures: If you're thinking of setting up multiple companies, be aware of the associated company rules. Sometimes a single company is simpler and more tax-efficient.
• Use of losses: Trading losses can be carried forward or back to reduce taxable profits. If you're in the Marginal Relief band, a loss claim might drop you into the 19% band, saving more tax per pound of loss than you'd expect.

What to do next

If you're unsure which band your company falls into, or you want to model different scenarios (e.g. "What if I defer £20,000 of income?"), AI Tax chat can walk you through the calculations step-by-step with your specific figures.

If your company's tax affairs are getting complicated—multiple income streams, associated companies, or you're simply too busy to handle it yourself—AI Accountant offers full-service support: we prepare and file your Company Tax Return, calculate Marginal Relief, and handle all HMRC correspondence, so you can focus on running your business.

Corporation Tax might look straightforward on the surface, but the Marginal Relief rules add a layer of complexity that's worth understanding. With the right knowledge (or the right support), you can make sure you're paying the correct amount—no more, no less—and plan your business finances with confidence.