Profits between £50,000 and £250,000 are not simply taxed at 25%. A specific formula tapers the rate, and it is worth understanding exactly what it does.
Zazentax Corporation Tax Series · Updated July 2026 · Reading time: about 6 minutes
Part 2 of this series introduced the headline structure: companies with taxable total profits, usually shortened to TTP, of £50,000 or less pay corporation tax at the small profits rate of 19%, and companies above £250,000 pay the main rate of 25%. What sits between those two figures is not a simple average or a straight application of either rate. It is marginal relief, a formula designed so that a company’s overall tax bill rises smoothly as profit increases, rather than jumping abruptly the moment it crosses £50,000.
Why a Formula Is Needed at All
Without marginal relief, a company earning £49,999 would pay 19%, roughly £9,500, while a company earning one pound more would suddenly pay 25% on the whole amount, over £12,500. An extra pound of profit would cost the company thousands of pounds in extra tax, an obviously unreasonable outcome. Marginal relief smooths this transition. Every company in the band between £50,000 and £250,000 is initially taxed at the full 25% main rate, and a deduction is then calculated to bring the effective rate down, closer to 19% for companies near the bottom of the band and closer to 25% for companies near the top.
The Formula Itself
Marginal relief is calculated as a fixed fraction, multiplied by the difference between the upper limit and the company’s augmented profits, multiplied again by the company’s TTP divided by its augmented profits. The fixed fraction has been 3 divided by 200 since these rates were introduced for the financial year beginning 1 April 2023, and it remains unchanged for 2026/27.
Augmented profits, covered fully in the next part of this series, are normally identical to TTP unless the company has received dividends from outside its own group, in which case those dividends are added in purely to test which rate band applies. For a company with no such dividends, TTP and augmented profits are simply the same figure, and the final part of the formula, TTP divided by augmented profits, equals exactly one.
A Worked Example
Ferrow Logistics Ltd has taxable total profits of £96,000 for the year ended 31 March 2027, a twelve month accounting period with no dividends received from anywhere, so its augmented profits are also £96,000. Because this figure sits between £50,000 and £250,000, marginal relief applies.
The starting point is corporation tax at the full main rate: £96,000 multiplied by 25%, which equals £24,000. Marginal relief is then 3 divided by 200, multiplied by £250,000 minus £96,000, which is £154,000, multiplied by £96,000 divided by £96,000, which is one. That gives 3 divided by 200 multiplied by £154,000, which equals £2,310. Ferrow Logistics Ltd’s final corporation tax liability is £24,000 minus £2,310, which equals £21,690.
Key point: Ferrow Logistics Ltd’s effective rate works out at £21,690 divided by £96,000, which is roughly 22.6%, comfortably between the 19% and 25% headline rates. This is exactly what marginal relief is designed to produce: the closer a company’s profit sits to £50,000, the closer its effective rate sits to 19%, and the closer it sits to £250,000, the closer to 25%.
The Company Still Owes Tax at Every Stage
A common misunderstanding is that marginal relief means no tax is due on part of the profit. It does not. Every pound of TTP is taxed; marginal relief simply reduces the rate applied to the whole figure once the initial 25% calculation has been done. The relief is also automatic wherever a company’s augmented profits fall within the band; there is no election and nothing separate to claim, it simply falls out of the standard corporation tax computation.
Action required: If your company operates through more than one associated company under common control, the £50,000 and £250,000 thresholds are divided between them before this calculation begins, which changes the band each company falls into. Confirm your associated company position before assuming marginal relief applies, or does not, based on the standalone limits.
Key Takeaways
- Marginal relief applies to companies with augmented profits between £50,000 and £250,000, tapering the effective rate between the 19% small profits rate and the 25% main rate.
- The formula is 3 divided by 200, multiplied by the upper limit minus augmented profits, multiplied by TTP divided by augmented profits.
- The starting calculation is always corporation tax at the full 25% main rate; marginal relief is then deducted from that figure.
- The relief is automatic and requires no separate claim or election.
- The £50,000 and £250,000 thresholds are divided between associated companies under common control before the calculation is applied.
Not Sure Which Side of the Marginal Relief Band Your Company Sits In?
Zazentax works out your augmented profits, confirms your associated company position, and calculates the liability so you know the effective rate before the return is filed.
