Dividends are never taxable income for a UK company, yet they can still push it into a higher tax band. The reason lies in a figure called augmented profits.
Zazentax Corporation Tax Series · Updated July 2026 · Reading time: about 6 minutes
Part 4 of this series showed how marginal relief tapers the corporation tax rate for companies with taxable total profits, usually shortened to TTP, between £50,000 and £250,000. That explanation left one figure unexplained: augmented profits, the number actually compared against those two thresholds. For most companies, augmented profits and TTP are identical. For a company that has received dividends from outside its own group, they are not, and the gap between the two can move a company from the small profits rate into marginal relief, or from marginal relief into the full main rate, without a single extra pound of taxable trading income.
The Rule in One Sentence
Augmented profits are calculated by taking TTP and adding back most dividends the company has received during the accounting period. This is the only purpose the figure serves; it decides which rate band applies. The dividends themselves are never taxed. UK companies are not generally charged corporation tax on dividend income at all, a point covered in Part 2 of this series, so adding them back here does not create a tax charge on the dividends. It only changes which rate is charged on the profit that is genuinely taxable.
Key point: Think of augmented profits as a test, not a tax base. Corporation tax is always calculated on TTP. Augmented profits exist purely to answer the question: which of the three rate outcomes, small profits rate, marginal relief, or main rate, applies to this company this year.
The Exception That Changes Everything: The 51% Subsidiary Rule
Not every dividend counts. Dividends received from a company’s own 51% subsidiaries, meaning companies in which it holds more than half of the ordinary share capital, are excluded from augmented profits entirely. The logic is straightforward: profits moving around inside a genuinely connected group should not distort the rate band test, since the underlying business activity is really one economic unit viewed from outside, even though it is split across several legal companies. Dividends from an unconnected company, one the recipient does not control in this way, receive no such exclusion and are added back in full.
This single distinction, connected or unconnected, determines whether receiving a dividend has any effect on a company’s tax rate at all.
Two Companies, the Same Trading Profit, Different Bills
Northgate Supplies Ltd has a TTP of £42,000 for the year ended 31 March 2027. During the year it also received a £15,000 dividend from a company in which it holds a small, unconnected shareholding, purely as an investment. Because that company is not a 51% subsidiary, the dividend is added back in full, giving augmented profits of £42,000 plus £15,000, which equals £57,000. That figure exceeds the £50,000 lower limit, so Northgate Supplies Ltd cannot use the small profits rate and falls into marginal relief instead, even though its actual taxable profit is only £42,000.
Working through the calculation, corporation tax on the £42,000 TTP starts at the main rate: £42,000 multiplied by 25%, which equals £10,500. Marginal relief is then 3 divided by 200, multiplied by £250,000 minus £57,000, which is £193,000, multiplied by £42,000 divided by £57,000. That gives a relief of approximately £2,133, leaving a final liability of £10,500 minus £2,133, which equals roughly £8,367.
Solmere Holdings Ltd has an identical TTP of £42,000 for the same year, and also receives a £15,000 dividend. The only difference is where the dividend comes from: an 80% owned trading subsidiary, well above the 51% threshold. This dividend is excluded from augmented profits entirely, so Solmere Holdings Ltd’s augmented profits are simply £42,000, at or below the £50,000 lower limit. The small profits rate applies in full: £42,000 multiplied by 19%, which equals £7,980.
Action required: Two companies with the same trading profit and the same size of dividend can end up roughly £387 apart in their tax bill, purely because of where the dividend originated. Before assuming your company qualifies for the small profits rate, check whether any dividends received during the year came from outside a 51% owned group.
One Further Group Worth Knowing
Non-UK resident companies that are nonetheless liable to UK corporation tax, for instance through a UK permanent establishment, always pay at the main rate regardless of how small their augmented profits are. Neither the small profits rate nor marginal relief is available to them, a rule worth flagging for any group with an overseas parent trading directly into the UK rather than through a UK subsidiary.
Key Takeaways
- Augmented profits equal TTP plus dividends received, and exist only to decide which corporation tax rate band applies; the tax itself is always calculated on TTP.
- Dividends from a company’s own 51% subsidiaries are excluded from augmented profits; dividends from unconnected companies are added back in full.
- The same trading profit can face different effective tax rates purely depending on the source of any dividends received during the year.
- Non-resident companies liable to UK corporation tax always pay the main rate, regardless of their augmented profits.
- Check the ownership percentage behind any dividend before assuming your company’s rate band, since the gap can be worth several hundred pounds even on modest profits.
Received Dividends This Year and Unsure How They Affect Your Rate?
Zazentax traces every dividend your company received, separates group income from outside investments, and confirms the rate band before the figures reach your return.
