UK Corporation Tax Marginal Relief Explained: The 26.5% Trap Between £50,000 and £250,000

Ask most UK company directors what rate of Corporation Tax they pay, and you'll get one of two answers: 19% or 25%. Neither is wrong, but neither is the full picture if your company's taxable profit sits anywhere between £50,000 and £250,000 — because within that band, the rate that actually applies to your next pound of profit is 26.5%, higher than either headline figure.

The structure itself has been stable since 1 April 2023 and remains unchanged for the 2026/27 tax year, with no rate or threshold changes announced. Companies with taxable profits up to £50,000 pay the small profits rate of 19%. Companies with profits above £250,000 pay the main rate of 25%. Profits falling between the two thresholds are taxed using marginal relief, a sliding-scale mechanism that tapers the effective rate smoothly from 19% up to 25% across the band, rather than letting a company fall off a cliff edge the moment it crosses £50,000.

The mechanics of marginal relief work in the opposite direction to how most people initially assume. Rather than applying a reduced rate directly, HMRC's method starts by taxing the whole profit at the full 25% main rate, then subtracts a relief amount calculated as the gap between £250,000 and your profit, multiplied by a fixed fraction of 3/200 — equivalent to 1.5%. The formula is straightforward arithmetic once you see it laid out: take £250,000, subtract your taxable profit, multiply the result by 3/200, and subtract that figure from 25% of your profit.

Working through a company with £100,000 in taxable profit shows exactly how this plays out. Taxing the full amount at 25% gives £25,000. The relief calculation takes £250,000 minus £100,000, giving £150,000, multiplied by 3/200, giving £2,250 of relief. Subtracting that relief from the initial £25,000 leaves a final Corporation Tax bill of £22,750 — an effective rate of 22.75%, sitting neatly between the two headline rates.

A company with £150,000 in profit follows the same pattern: 25% of £150,000 is £37,500, the relief is £100,000 multiplied by 3/200, giving £1,500, and the final bill comes to £36,000 — an effective rate of 24%. Push profits up to £200,000 and the same method gives a final bill of £49,250, an effective rate of 24.62%. By the time profit reaches exactly £250,000, the relief calculation reduces to zero, and the company simply pays the full 25% main rate — £62,500 on £250,000 of profit, with no relief left to claim.

It's worth being precise about the boundary at exactly £50,000: a company sitting exactly at that threshold doesn't need the marginal relief formula at all. It still qualifies for the small profits rate directly, paying a flat 19% — £9,500 on £50,000 of profit. Marginal relief only becomes relevant for profits above that £50,000 line, tapering up toward the main rate from there.

The genuinely underappreciated number in all of this is the marginal rate — the tax rate that applies specifically to your next pound of profit, as distinct from your effective rate on your whole profit. Because marginal relief shrinks as profit rises, every additional pound earned within the £50,000-£250,000 band is taxed at the 25% main rate on that pound, plus an extra 1.5 percentage points from the shrinking relief — a combined marginal rate of 26.5%. That's higher than the 25% rate a company pays once its entire profit clears £250,000, which produces the counterintuitive result that a company earning its last pound inside the band is taxed more heavily on that pound than a company earning comfortably above the upper threshold.

Group structures complicate this considerably, because the £50,000 and £250,000 thresholds aren't fixed per company — they're shared across any associated companies under common control. Two companies controlled by the same person or group are associated, and each associated company divides both thresholds by one plus the total number of associates. One associated company halves the limits to £25,000 and £125,000. Two associated companies push them down further, to roughly £16,667 and £83,333. A company that assumes it has the full £50,000-£250,000 band to work with, without checking whether it has any associated companies, can end up significantly underestimating its tax bill — this is one of the more commonly cited sources of Corporation Tax miscalculation among small company groups, and it's worth checking associated company status carefully any time a new company is incorporated anywhere in a group, since a new incorporation shifts everyone's thresholds at once.

Short accounting periods reduce the thresholds too, on a straightforward pro-rata basis — a company with a six-month accounting period works with half the usual £50,000 and £250,000 limits, since the thresholds are designed to reflect a full 12-month trading period.

For a director trying to plan around these thresholds rather than simply react to them at year end, a few practical points are worth holding onto: knowing precisely where your company's profit sits relative to £50,000 and £250,000, after accounting for any associated companies, tells you your actual marginal rate before you make a spending or investment decision late in the accounting year. Capital expenditure and pension contributions that reduce taxable profit are worth more, pound for pound, when they pull profit down out of the 26.5% marginal band than when a company is comfortably below £50,000 or above £250,000 to begin with. And Corporation Tax itself remains due nine months and one day after the end of the accounting period for companies below the large-company threshold, a deadline worth building into planning well before it arrives rather than treating as a formality once the accounts are finalised.