Marginal relief is the mechanism that smooths the corporation tax rate between the small profits rate of 19% and the main rate of 25%. Without it, a company crossing £50,000 of profit by a single pound would face a steep increase in tax. Marginal relief instead tapers the effective rate across the £50,000 to £250,000 band, so the rate rises gradually as profit grows. The calculation is not difficult once the formula and the standard fraction are clear, but the figures it produces surprise owners who assume the marginal band simply means paying 25% above £50,000.
This spoke belongs to the corporation tax and year-end accounts hub and gives the full calculation with worked examples. For the rate framework that sits behind it, read the 25% main rate and 19% small profits rate spoke first. For when the resulting tax is actually due and reported, see the CT600 and annual accounts filing deadlines spoke.
The marginal relief formula
Marginal relief is calculated in two steps. First, charge corporation tax on the whole profit at the main rate of 25%. Second, subtract a relief figure. The relief is the upper limit minus the company's profit, multiplied by the standard marginal relief fraction. For the 2026-27 financial year the standard fraction is 3/200. Expressed as a formula, marginal relief equals (upper limit minus profit) multiplied by 3/200, and the corporation tax payable equals profit at 25% minus that marginal relief.
- Step one: corporation tax at 25% on the full taxable profit.
- Step two: marginal relief equals (£250,000 upper limit minus profit) multiplied by 3/200.
- Step three: corporation tax payable equals step one minus step two.
- The 3/200 standard fraction applies where the company has no augmenting non-group dividends.
The upper limit of £250,000 and the lower limit of £50,000 in this calculation are the same limits used to decide which rate band applies, and they are subject to the same adjustments: divided by the number of associated companies plus one, and pro-rated for accounting periods shorter than twelve months.
A worked example at £150,000 profit
Take a company with £150,000 of taxable profit, no associated companies and a full twelve-month period. Step one: tax at 25% on £150,000 is £37,500. Step two: marginal relief is (£250,000 minus £150,000) multiplied by 3/200, which is £100,000 multiplied by 0.015, giving £1,500. Step three: corporation tax payable is £37,500 minus £1,500, which is £36,000. The effective rate is £36,000 divided by £150,000, which is 24%.
The effective rate across the band
Running the calculation at several profit levels shows how the effective rate climbs steadily from 19% at the lower limit toward 25% at the upper limit. At £50,000 the effective rate is 19%. At £100,000 it is around 22%. At £150,000 it is 24%. At £200,000 it is around 24.6%. At £250,000 it reaches 25%. The curve is the deliberate design of marginal relief: no cliff edge, just a smooth rise.
The 26.5% marginal rate on the slice
The effective rate on total profit understates what really matters for planning: the marginal rate on the next pound of profit in the band. Each additional pound of profit between £50,000 and £250,000 is taxed at 26.5%, not 25% and not the headline 19%. This is because as profit rises, marginal relief shrinks, so the extra tax on each additional pound is greater than the headline rate suggests. An owner who increases profit from £100,000 to £150,000 pays an extra £13,250 in corporation tax on that £50,000 slice, an effective 26.5% on the additional profit.
The 26.5% marginal rate is the single most useful number to carry into a planning meeting. It is the figure that makes a pension contribution, a deferred dividend or accelerated capital expenditure more valuable in this band than at either extreme, because each pound of deductible spend saves 26.5p of corporation tax rather than 25p or 19p.
How associated companies change the calculation
Where the company has associated companies, both limits in the formula reduce before the calculation begins. With one associate the upper limit becomes £125,000 and the lower limit becomes £25,000. A company with £100,000 of profit and one associate uses an upper limit of £125,000: marginal relief is (£125,000 minus £100,000) multiplied by 3/200, which is £25,000 multiplied by 0.015, giving £375. Tax at 25% on £100,000 is £25,000, so corporation tax payable is £24,625. The reduced limits push more of the profit toward the main rate.
Why the second company changes things
The reduced limits explain why opening a second company is rarely tax-neutral. With the upper limit halved, a company reaches the full 25% rate at £125,000 rather than £250,000, and the marginal relief available at any given profit level is smaller. Owners considering a second trading company should model the combined corporation tax position before and after, because the marginal relief lost across both companies can outweigh the commercial reason for the split.
Short accounting periods in the calculation
For a period shorter than twelve months, both limits are pro-rated on a daily basis before the formula is applied. A six-month period uses an upper limit of £125,000 and a lower limit of £25,000. The marginal relief fraction itself does not change; only the limits move. This matters most in a company's first year, when the first accounting period is often shorter than twelve months and the reduced limits can place a modest profit inside the marginal band unexpectedly.
Step-by-step calculation checklist
- Confirm taxable total profits for the accounting period.
- Establish the lower and upper limits, adjusted for associated companies and period length.
- If profit is at or below the adjusted lower limit, apply 19% and stop.
- If profit is at or above the adjusted upper limit, apply 25% and stop.
- If profit is within the band, calculate tax at 25% on the full profit.
- Calculate marginal relief as (adjusted upper limit minus profit) multiplied by 3/200.
- Subtract marginal relief from the 25% figure to give corporation tax payable.
Planning levers in the marginal band
Because each pound in the band carries a 26.5% marginal cost, deductible expenditure delivers its highest corporation tax saving here. Employer pension contributions reduce taxable profit and are deductible in the period paid. Capital allowances, including the annual investment allowance and full expensing on qualifying plant and machinery, can be timed to land in a marginal-band year. Genuine business expenditure brought forward into the period reduces profit at the 26.5% marginal rate. None of this is about avoidance; it is about timing genuine, deductible costs to fall where the marginal saving is greatest.
A common error: applying 25% then forgetting the relief
The single most frequent mistake owners make when estimating their own tax is to charge profit in the band at the flat 25% rate and stop there, forgetting that marginal relief is then deducted. On £150,000 of profit that error overstates the tax by £1,500, the full marginal relief figure. The opposite error, applying 19% to the whole profit because it feels like the small company rate, understates the tax by a larger margin. Neither shortcut is correct in the band; the two-step calculation of 25% less marginal relief is the only reliable method.
A related slip is forgetting that marginal relief only exists inside the band. A company exactly at or below the lower limit pays a flat 19% with no relief involved, and a company at or above the upper limit pays a flat 25% with no relief either. The relief figure is meaningful only for profits strictly between the two limits, and it falls to zero at the upper limit by design.
When the calculation is best left to your accountant
The formula itself is simple, but the inputs are where errors creep in: identifying every associated company, pro-rating limits correctly for an unusual period, and capturing augmenting dividends from outside the group. An accountant prepares the marginal relief calculation as part of the CT600 and reconciles it to the statutory accounts, which is where it is reported. For the deadlines that govern when that return and the resulting payment are due, see the CT600 and annual accounts filing deadlines spoke.
Frequently asked questions
What is the marginal relief fraction for 2026?
The standard marginal relief fraction is 3/200, equal to 0.015. It is the figure multiplied by the difference between the upper limit and the company's profit to give the relief. A different fraction can apply where a company receives qualifying distributions from outside its group, but for the typical owner-managed trading company with no such income the standard 3/200 fraction applies.
Why is my effective rate above 24% near the top of the band?
As profit approaches the upper limit, marginal relief shrinks toward zero, so the effective rate climbs toward the full 25%. At £200,000 the effective rate is around 24.6% and at £250,000 it reaches 25%. The closer profit is to £250,000, the smaller the benefit of marginal relief.
Does marginal relief reduce the tax I actually pay or just the rate?
It reduces the tax payable. Marginal relief is a cash reduction subtracted from the 25% charge, not merely a rate label. In the £150,000 example, marginal relief of £1,500 is a real reduction in the corporation tax due, taking it from £37,500 to £36,000.