If your company’s profits have crept past £50,000, you may have noticed your accountant mention ‘marginal relief’ on your corporation tax computation and wondered what it actually means for your bill. Many SME owners assume that once profits cross £50,000, the full 25% rate kicks in overnight. That is not true, and getting it wrong can mean budgeting far too much — or too little — for your tax payment. This article explains exactly how the UK’s tiered corporation tax system works between £50,000 and £250,000, with a full worked example so you can check your own figures.
The business problem: two rates, but not a sudden jump
Since April 2023, the UK has had two headline corporation tax rates. Companies with profits up to £50,000 pay tax at the small profits rate of 19%. Companies with profits above £250,000 pay the main rate of 25%. The confusion starts in between. A company earning £120,000 does not simply pay 25% on everything, and it does not pay 19% either. Instead, a mechanism called marginal relief smooths the transition, so the effective tax rate rises gradually from 19% to 25% as profits increase through that £200,000 band. If you plan your tax reserve using a flat 25%, you will almost certainly overestimate your liability — sometimes by thousands of pounds.
What marginal relief actually is, in plain English
Marginal relief is not a separate tax rate. It is a deduction you subtract from the tax you would otherwise owe at the main 25% rate. HMRC starts by assuming every company with profits above £50,000 pays 25% on all of its profit, then gives back a slice of that tax through the relief, depending on how close the company’s profits are to the £50,000 lower limit. The closer you are to £50,000, the bigger the relief; the closer you are to £250,000, the smaller the relief, until it disappears entirely at £250,000.
The calculation uses a standard formula set by HMRC for each financial year. For the current rules, the formula is: Marginal Relief = (Upper Limit − Augmented Profits) × (Taxable Total Profits ÷ Augmented Profits) × Standard Fraction. The Upper Limit is £250,000, the Standard Fraction is 3/200, and ‘augmented profits’ simply means your taxable profits plus any dividends received from companies you do not control (most SMEs have none of these, so augmented profits usually equal taxable profits).
Key point: marginal relief is calculated automatically by most tax software and by HMRC’s own online calculator. You do not need to memorise the formula — but understanding it means you can sense-check your tax bill and spot errors before they reach your bank balance.
How the effective rate moves as profits rise
The table below shows the marginal relief calculation at six different profit levels, assuming the company has no associated companies and no outside dividend income (the most common SME scenario). Notice how the effective tax rate — the actual percentage of profit paid in tax — climbs steadily rather than jumping straight to 25%.
| Taxable Profit | Tax at 25% (before relief) | Marginal Relief Deduction | Corporation Tax Payable | Effective Tax Rate |
|---|---|---|---|---|
| £50,000 | £12,500 | £3,000 | £9,500 | 19.00% |
| £75,000 | £18,750 | £2,625 | £16,125 | 21.50% |
| £100,000 | £25,000 | £2,250 | £22,750 | 22.75% |
| £150,000 | £37,500 | £1,500 | £36,000 | 24.00% |
| £200,000 | £50,000 | £750 | £49,250 | 24.63% |
| £250,000 | £62,500 | £0 | £62,500 | 25.00% |
Worked example: a real company with £120,000 profit
Let’s say your company, a small manufacturing business, makes taxable profits of £120,000 for the year. You have no associated companies and receive no dividends from outside investments, so your augmented profits are also £120,000. Here is how the computation runs step by step.
| Taxable profit | £120,000 |
| Tax at main rate (25% × £120,000) | £30,000 |
| Upper limit minus profit (£250,000 − £120,000) | £130,000 |
| Marginal relief fraction applied (£130,000 × 3/200) | £1,950 |
| Corporation tax payable (£30,000 − £1,950) | £28,050 |
So instead of paying £30,000 — a flat 25% — this company pays £28,050, an effective rate of 23.375%. That £1,950 difference is the marginal relief, and it is a real cash saving, not just a rounding adjustment. For a growing SME, knowing this in advance means you can set aside the correct amount for your tax reserve rather than over-provisioning and tying up working capital unnecessarily.
Recording the tax provision in your accounts
Once the computation is finalised, the corporation tax charge needs to be recognised in the company’s accounts as a year-end provision, reducing retained profit and creating a liability until it is paid. Using the £120,000 profit example above, the year-end journal would look like this.
| Account | Dr | Cr |
|---|---|---|
| Corporation tax expense (profit and loss account) | £28,050 | |
| Corporation tax liability (balance sheet) | £28,050 |
Year-end provision for corporation tax after marginal relief, based on taxable profit of £120,000 at an effective rate of 23.375%.
Common mistake: if your company has ‘associated companies’ — broadly, other companies under common control (excluding purely dormant companies carrying on no trade or business, though non-passive holding companies count) — the £50,000 and £250,000 limits are divided by the total number of associated companies plus one. This can push a business into a higher effective rate much sooner than expected. Many SME groups miss this entirely and underpay tax as a result, which HMRC will later correct with interest. Always flag group or family-owned structures to your accountant before year end.
Why this matters beyond the tax return
Marginal relief is not just a compliance detail — it affects real business decisions. If you are deciding whether to extract profit as salary, dividend, or retained earnings, the effective tax rate on the retained portion changes the maths. If you are forecasting cash flow for the next accounting period, using a flat 25% assumption for a company sitting at £150,000 profit will overstate your tax reserve by thousands of pounds. And if you are considering restructuring a group — merging two companies, or splitting a trade into a new entity — the associated companies rule can dramatically change your effective tax position, sometimes in ways that make consolidation more attractive than keeping separate entities.
- Do not assume 25% applies as soon as profits exceed £50,000 — between £50,000 and £250,000, marginal relief smooths the rate gradually, so your actual tax bill will be lower than a flat 25% calculation suggests.
- Use the formula (or HMRC’s free online marginal relief calculator) to check your accountant’s computation, especially if your profits sit in the £75,000 to £200,000 range where the relief has the biggest cash impact.
- Review whether your business has any associated companies — such as active holding companies or family-owned businesses with substantial commercial interdependence (purely dormant companies that carry on no trade or business are excluded) — because this divides the £50,000 and £250,000 limits and can increase your effective tax rate sooner than you expect.
- When forecasting cash reserves for your next corporation tax payment, build your provision around the effective rate from the table above rather than a flat 25%, so you are not tying up unnecessary working capital.
Want help making sense of your corporation tax position?
If you are unsure how marginal relief, associated companies, or group structures affect your tax bill, our team can walk through your numbers with you in plain English — no jargon, just clarity on what your figures mean for your business.
