Since 1 April 2023, UK corporation tax has run on two rates rather than the single flat rate that applied beforehand. The small profits rate of 19% applies where taxable profits do not exceed £50,000. The main rate of 25% applies where profits exceed £250,000. Between those two limits, profits are charged at 25% with marginal relief, which tapers the effective rate so that no company faces a sudden jump from 19% to 25% the moment profits tip over £50,000. For most owner-managed companies in Harrow and across the UK, understanding which rate applies is the first step in any year-end planning conversation.
This article sits within the corporation tax and year-end accounts hub and explains the two-rate structure, the limits, and the factors that change them. The companion spokes cover how marginal relief is calculated for profits between £50k and £250k and the filing deadlines for your CT600 and annual accounts. Read this one first to understand the rate framework, then the marginal relief spoke to see the arithmetic in the middle band.
The two-rate structure at a glance
The simplest way to hold the structure in mind is a three-band table. The 19% band and the 25% band are flat. The middle band carries the 25% headline rate but is softened by marginal relief, which produces an effective rate higher than 19% but lower than 25%.
The £50,000 figure is the lower limit and the £250,000 figure is the upper limit. Both are standardised limits set by HMRC and both are subject to adjustment in two common situations: where a company has associated companies, and where the accounting period is shorter than twelve months. Each adjustment is covered below.
What counts as profit for the rate test
The rate test applies to taxable total profits, which is the figure after deducting allowable expenses, capital allowances and any reliefs, and after adding chargeable gains. It is not turnover and it is not accounting profit before adjustments. A company with £400,000 of turnover but only £45,000 of taxable profit after costs and capital allowances sits in the 19% band, because the test looks at profit, not the headline size of the business.
One refinement matters for the limits themselves. Where a company receives certain distributions from companies it does not control, broadly dividends from non-group companies, those amounts are added to profits when testing against the limits even though they are not themselves charged to corporation tax. For most owner-managed trading companies this is rarely in point, but it is the reason the technical term for the test figure is augmented profits rather than simply taxable profits.
How associated companies divide the limits
The single most important adjustment for owner-managed groups is the associated companies rule. The £50,000 and £250,000 limits are not per company in isolation. They are divided by the number of associated companies plus one (the company itself). A company with no associates keeps the full £50,000 and £250,000. A company with one associate halves both limits. A company with two associates divides them by three.
A company is associated with another where one controls the other, or both are under common control. Control is usually a holding of more than 50% of share capital, voting power or rights to profit on a winding up. Dormant companies and certain passive holding companies are excluded, but a second active trading company owned by the same director is very much counted.
A worked associated companies example
A director owns two trading companies. Company A makes £40,000 profit and Company B makes £30,000 profit. Viewed in isolation, both sit under £50,000 and would expect the 19% rate. Because they are associated, the lower limit halves to £25,000 each. Both companies now exceed their reduced lower limit and fall into the marginal relief band, paying an effective rate above 19% rather than the flat small profits rate. This is a frequent and avoidable surprise for owners who set up a second company without considering the corporation tax consequence.
Short accounting periods and pro-rating
The limits assume a twelve-month accounting period. Where a period is shorter, the limits are reduced proportionally. A six-month accounting period, common in a company's first year or when changing its year-end, carries a lower limit of £25,000 and an upper limit of £125,000. A nine-month period carries limits of £37,500 and £187,500. The pro-rating is on a daily basis, so the precise figures follow the exact number of days in the period.
A long period of account exceeding twelve months is split into two accounting periods for corporation tax, the first twelve months and the remainder, with the limits applied separately to each. The company files two CT600 returns covering one set of statutory accounts.
Why the marginal band matters more than the extremes
A company sitting comfortably under £50,000 pays 19% on every pound and a company well over £250,000 pays 25% on every pound. Planning has limited leverage at either extreme. The companies where year-end planning earns its keep are those in the £50,000 to £250,000 band, because each additional pound of profit in that band is effectively taxed at a higher marginal rate than 25%. Pension contributions, the timing of capital allowances and the timing of dividends all have more impact in this band. The mechanics of that marginal rate are set out in full in the marginal relief spoke.
The effective rate is not the headline rate
It is worth separating two ideas that owners frequently merge. The headline rate is the percentage written into the legislation for a band: 19%, or 25%. The effective rate is the actual proportion of total profit paid in corporation tax once marginal relief is taken into account. A company with £150,000 of profit has a 25% headline rate but, after marginal relief, an effective rate around 24%. The effective rate is the number that matters for budgeting and for comparing a limited company against the sole trader alternative.
How the rates interact with the wider tax picture
Corporation tax is only the first layer. Profit retained in the company is taxed once, at the relevant corporation tax rate. Profit extracted as dividends is then taxed again in the director's hands at dividend rates. Profit extracted as salary is deductible for the company but attracts income tax and National Insurance personally. The corporation tax rate therefore sets the baseline, but the total tax cost of getting money out of the company depends on the extraction method. This is why rate planning and remuneration planning are usually done together rather than in isolation.
Common mistakes around the two rates
- Assuming a second company is taxed independently, when in fact it halves both limits for both companies.
- Treating turnover rather than taxable profit as the figure that decides the rate.
- Forgetting to pro-rate the limits for a short first accounting period.
- Ignoring the marginal band and assuming the rate jumps cleanly from 19% to 25% at £50,000.
- Overlooking dividends from outside the group when testing profits against the limits.
When to take advice on the rate position
For a single company comfortably inside the 19% band with no associates and a standard twelve-month year, the rate position is straightforward and self-explanatory. Advice becomes valuable where a company is in or approaching the marginal band, where there is more than one company under common ownership, where the year-end is changing, or where a corporate group structure is being considered. In each of those cases the interaction between the limits, the associated companies rule and the extraction strategy can move the effective rate by several percentage points, which on £50,000 to £200,000 of profit is a material sum.
Frequently asked questions
Does every limited company qualify for the 19% rate?
The 19% small profits rate is available to most companies whose taxable profits do not exceed the lower limit, but it is not available to close investment-holding companies, which pay the 25% main rate regardless of profit level. Ordinary owner-managed trading companies and most property and service companies qualify for the small profits rate where their profits are within the lower limit.
What happens to the rate if I open a second company?
A second active company under your control is an associated company. Both the £50,000 and £250,000 limits are divided between the two companies, so each company reaches the marginal band and the main rate at half the profit it otherwise would. Where the second company is genuinely dormant throughout the period, it is generally excluded from the count.
Will the rates change again soon?
The two-rate structure has been in place since April 2023 and applies for the 2026-27 financial year. Rates and limits are set in successive Finance Acts, so they can change at any fiscal event. Check the current position with HMRC or your accountant when planning a transaction that straddles a financial year, but plan on the basis of the published rates for the period in question.