Corporation Tax Marginal Relief

Q: What happens if I miss the Self Assessment deadline?

The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.

Q: Do I need an accountant or can I file Self Assessment myself?

Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.

Q: How do payments on account work?

When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.

Q: My company has £180,000 profits, what's my actual CT bill?

Apply marginal relief formula. Standard 25% × £180,000 = £45,000 (gross CT before relief). Marginal relief = 3/200 × (£250,000 - £180,000) × (£180,000 ÷ £180,000) = 3/200 × £70,000 × 1 = £1,050. Net CT = £45,000 - £1,050 = £43,950. Effective CT rate: 24.4%. Verify against expected position: profits within band → effective rate between 19% (at £50k) + 25% (at £250k), trending up. £180k is in mid-band → effective rate ~24.4% as calculated. HMRC has an online marginal relief calculator at gov.uk/marginal-relief-calculator, use it for any period-specific computation.

Q: Why is the effective marginal rate 26.5% in the band?

Mathematical artefact of how the marginal relief formula works. The 3/200 fraction (= 1.5%) applies to the DIFFERENCE between upper limit + augmented profits. As profits rise by £1, the (Upper limit - Augmented profits) term reduces by £1, so the relief reduces by £1 × 3/200 = 1.5p. Combined with the 25% main rate applied to the additional £1, the marginal increase in CT is 25p + 1.5p = 26.5p. Strategy implication: profits in the band are taxed MORE heavily per pound than profits above the band. Companies often structure expenses, dividends, or pension contributions to either stay below £50k (19%) or push into the £250k+ range (25%), avoiding the 26.5% marginal zone where possible.

Q: How do 'associated companies' affect the thresholds?

The £50,000 SPR threshold + £250,000 main rate threshold are REDUCED for each associated company in the group, by dividing each threshold by (1 + number of associated companies). Example: company with 2 associated companies → 3 companies total in group → each company's effective SPR threshold = £50,000 / 3 = £16,667; each company's effective main rate threshold = £250,000 / 3 = £83,333. Definition of 'associated companies' is complex but broadly means companies under common control (the same individual or persons control all of them). Common in owner-managed group structures, holding company + subsidiary arrangements, and structures with multiple Ltd Co subsidiaries. ICAEW warned in 2025 that some companies have INCORRECTLY claimed full marginal relief without applying associated-company reductions, specifically targeted by HMRC's 2024-2025 compliance reviews.

Q: Can I shift profits between years to avoid the 26.5% marginal band?

Limited options. Profits are recognised on accruals basis (Ltd Cos can't use cash basis), so timing manipulation requires genuine commercial decisions, accelerating expenses (pension contributions, equipment purchases, repairs), accelerating salary/bonus payments before year-end, deferring income recognition where commercially appropriate. **Substantial pension contributions** are the most flexible single mechanism: a £100,000 employer pension contribution before year-end can pull a company from £180,000 profit (mid-band, 26.5% marginal) down to £80,000 profit (still in band but lower) or even below £50,000 SPR. **Accelerated capital expenditure** via Full Expensing (Ltd Co only, 100% on new main-rate plant) or AIA (£1m/year cap) similarly shifts deductions forward. **Salary/bonus to directors** crystallises personal income tax + employee NI but reduces CT, useful when personal-rate position is favourable.

Corporation Tax Marginal Relief prevents a CLIFF-EDGE JUMP from 19% (Small Profits Rate, profits ≤£50,000) to 25% (main rate, profits >£250,000) for Ltd Cos whose augmented profits fall in the £50,000-£250,000 band. The mechanism applies the 25% main rate to ALL profits, then DEDUCTS a calculated reduction using HMRC's formula: Relief = 3/200 × (Upper limit £250,000 - Augmented profits) × (Taxable profits ÷ Augmented profits). The effective MARGINAL rate on profits within the band is 26.5%, meaning each additional £1 of profit between £50,000 and £250,000 costs 26.5p in CT (higher than the headline 25% main rate). This creates a clear incentive structure: time profits either BELOW £50,000 (19% SPR) or ABOVE £250,000 (where marginal rate drops back to 25%). The £50,000 + £250,000 thresholds are PROPORTIONATELY REDUCED for accounting periods shorter than 12 months + for ASSOCIATED COMPANIES (each associated company reduces both thresholds by the relevant fraction).

Last reviewed: 23 May 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact HMRC. Read our editorial scope →

What this relief is, in plain English

CT Marginal Relief is the Treasury's compromise mechanism for handling the 19% → 25% jump that Spring Budget 2023 introduced. Without marginal relief, a company with £51,000 profit would pay 25% × £51,000 = £12,750, vs a company with £49,999 profit paying 19% × £49,999 = £9,500. A £1,000 increase in profit would cost £3,250 in additional tax (a marginal rate of 325%). Marginal relief smooths this with a gradual taper across the £50,000-£250,000 band. The formula gives a clean tapered effective rate, 19% at £50,000, rising smoothly to 25% at £250,000, with the marginal rate at 26.5% on each additional pound in the band. The 26.5% marginal rate is HIGHER than either the SPR (19%) or main rate (25%), a deliberate policy choice incentivising profit-timing decisions either side of the band. For owner-managed Ltd Cos, the marginal band is the most consequential planning territory. Strategic responses: maximise employer pension contributions, accelerate Full Expensing capex, time bonus payments, defer income recognition where commercially feasible, all aimed at managing the year-by-year profit position relative to the £50k + £250k thresholds. The associated-companies rule (each related company reduces both thresholds proportionally) makes group planning + transaction-structuring decisions more complex than for standalone companies.

How it works

Three-band CT rate structure (2025/26)

**Up to £50,000 augmented profits**: 19% Small Profits Rate (SPR). **£50,001-£250,000**: 19%-25% (effective rate, tapered by marginal relief; marginal rate on each additional £ is 26.5%). **Over £250,000**: 25% main rate. The £50,000 + £250,000 thresholds are reduced for shorter periods (pro-rated) + for associated companies (divided by 1 + number of associates).

Marginal Relief formula

Net CT = (25% × Taxable Profits) - Marginal Relief. Marginal Relief = (3 ÷ 200) × (U - A) × (N ÷ A), where U = Upper limit (£250,000 adjusted); A = Augmented profits (taxable profits + most distributions); N = Taxable Total Profits excluding distributions. For most owner-managed Ltd Cos without complex distribution structures, A ≈ N, so the formula simplifies to: Marginal Relief ≈ 3/200 × (£250,000 - Profits) = 1.5% × (£250,000 - Profits). HMRC's online calculator at gov.uk/marginal-relief-calculator handles all the edge cases.

Associated companies reduce thresholds

Each associated company in the group reduces BOTH the £50,000 SPR threshold + the £250,000 main rate threshold proportionally. 2 associated companies → 3 companies total → each company's effective thresholds become £16,667 SPR + £83,333 main rate. Definition of 'associated' is complex, broadly, companies under common control by the same individual or persons. Holding company structures, sister companies, family-controlled groups all typically count. ICAEW + HMRC 2024-2025 compliance reviews specifically targeted incorrect marginal relief claims that ignored the associated-company reduction.

Short-period proportional reduction

For accounting periods shorter than 12 months (e.g. 6 months, 9 months), the £50,000 + £250,000 thresholds are proportionately reduced. 6-month period: thresholds become £25,000 SPR + £125,000 main rate. Common where companies change accounting reference date or in their first / last period of existence. Period length doesn't affect the 25% main rate or 19% SPR rates themselves, only the threshold values.

Who qualifies

Company within UK Corporation Tax charge
Augmented profits between £50,000 + £250,000 (for full 12-month standalone period)
Thresholds proportionally reduced for: shorter accounting periods + associated companies
Marginal relief automatically applied via CT600 computation, no separate election or claim form
Profit definition: augmented profits = trading profits + most distributions received (specific FII exclusions apply)

Interactions with other reliefs

Employment Allowance + Workplace Pension Employer Contributions

Both REDUCE taxable profits (Employment Allowance reduces salary cost; pension contributions reduce P&L), feeding into marginal relief calculation. For Ltd Cos near the £50k threshold, a £30,000 employer pension contribution + £10,500 Employment Allowance can pull profits from £85,000 down to ~£45,000, dropping below SPR threshold + saving the 26.5% marginal rate exposure.

Full Expensing + AIA

Capital allowances directly reduce taxable profits → feeds into marginal relief calculation. A Ltd Co with £180,000 profits + £100,000 of qualifying new plant + machinery (Full Expensing) brings profits to £80,000, saving the 26.5% marginal rate on £100,000 = £26,500 in CT vs gross. Effectively, Full Expensing in the marginal band gives 26.5% relief rather than 25% standard.

R&D Tax Credits (Merged Scheme)

R&D Tax Credit is an above-the-line credit, treated as taxable trading income (adds to profits) BEFORE the CT computation. A merged-scheme credit of £30,000 raises profits by £30,000, which could push a £40,000-profit company up into the marginal band. The 7-step relief mechanic addresses this via the notional tax step, but companies near band boundaries should model the interaction carefully.

Patent Box (10% effective rate)

Patent Box deduction reduces taxable profits to give 10% effective CT on qualifying patent income, bypasses marginal relief mechanics entirely on the Patent-Box-relieved portion. Companies eligible for both Patent Box + sitting in the marginal band derive substantial combined benefit: 10% on patent income + tapered effective rate on non-patent income.

Common mistakes + audit triggers

Forgetting to apply associated-company threshold reductions (specifically targeted by HMRC's 2024-2025 compliance reviews)
Ignoring short-period proportional reductions for periods <12 months
Confusing the 25% main rate (over £250k) with the 26.5% marginal rate (within £50k-£250k band)
Calculating marginal relief manually + introducing arithmetic errors, use HMRC's gov.uk calculator instead
Mistreating distributions received (some count toward augmented profits, FII rules exclude others)
Failing to model marginal relief impact when planning bonus + pension contribution + capex decisions
Treating marginal relief as a deduction available to ALL companies (it's only for those in the £50k-£250k band)
Year-end timing decisions made without modelling the marginal-rate impact (26.5% in band vs 25% above vs 19% below)

Worked example

Chioma, Newcastle - Ltd Co director, engineering consultancy with profits in the marginal band (2025/26)

Chioma's engineering consultancy Ltd Co (no associated companies, 12-month accounting period) has projected profits 2025/26 of £210,000 (before any pension contribution or salary planning). She extracts £40,000 salary (post-employer-NI position) + intends to take dividends. She's considering whether to make a large employer pension contribution to reduce CT.

Calculation: **Baseline: £210,000 profits, no pension contribution.** Gross CT at 25%: £210,000 × 25% = £52,500. Marginal Relief: 3/200 × (£250,000 - £210,000) × (£210,000 / £210,000) = 3/200 × £40,000 × 1 = £600. Net CT: £52,500 - £600 = **£51,900**. Effective rate: 24.7%. **Scenario A: £60,000 employer pension contribution.** Profits reduce to £150,000. Gross CT at 25%: £37,500. Marginal Relief: 3/200 × (£250,000 - £150,000) × 1 = 3/200 × £100,000 = £1,500. Net CT: £37,500 - £1,500 = **£36,000**. Effective rate: 24%. **Tax saved by £60,000 pension contribution: £51,900 - £36,000 = £15,900.** Effective rate on the £60,000 reduction: £15,900 / £60,000 = **26.5%**: exactly the marginal rate, confirming the 26.5% effective marginal calculation in the band. **Scenario B: £160,000 pension contribution (push profits below £50k SPR).** Profits reduce to £50,000. Gross CT at 19% SPR (no marginal relief, at SPR boundary): £50,000 × 19% = **£9,500**. Tax saved vs baseline: £51,900 - £9,500 = £42,400. Effective relief rate on the £160,000 contribution: 42,400 / 160,000 = **26.5%** average, driven by marginal band exposure on most of the £160k contribution. **Scenario C: £200,000 pension contribution (push profits to £10,000).** Profits reduce to £10,000. Gross CT at 19% SPR: £10,000 × 19% = **£1,900**. Tax saved vs baseline: £51,900 - £1,900 = £50,000. Effective relief rate: 50,000 / 200,000 = **25%**: averaging lower because the last £40,000 of contribution drops profits below £50k SPR boundary where SPR rate applies (only 19% effective, not 26.5% marginal). **Combined personal pension + CT analysis:** Chioma's £60,000 employer pension contribution scenario: - Company CT saving: £15,900 (26.5% effective) - Pension capacity used: £60,000 of standard £60,000 AA - No personal tax / NI on the pension contribution (employer route) - Pension fund grows tax-free; 25% tax-free lump sum at retirement (within LSA £268,275) **Strategic conclusion**: Pension contributions in the £50k-£250k profit band are HIGHLY EFFICIENT, 26.5% CT relief, no personal tax/NI cost. Use Carry Forward to extend deployment beyond £60,000 standard AA if previous years' allowances unused. The marginal band is the sweet spot for employer pension extraction.

Statute reference: Finance Act 2023 + Corporation Tax Act 2010 FA 2023 + CTA 2010 ss.18A-18I. HMRC manual: CTM03500 onwards.

Frequently asked questions

What happens if I miss the Self Assessment deadline?+

The Self Assessment deadline is 31 January (online filing) for the previous tax year. Miss it and HMRC apply an automatic £100 penalty. Beyond that: £10 per day from 3 months late (capped at £900), 5% of tax due at 6 months late, and another 5% at 12 months late, under Schedule 55 of the Taxes Management Act 1970. If you have a genuine reason (serious illness, bereavement, technical issue with HMRC's systems) you can appeal with evidence; HMRC accepts reasonable excuse appeals in most genuine cases.

Do I need an accountant or can I file Self Assessment myself?+

Legally you can file Self Assessment yourself via gov.uk for free, most simple sole-trader returns (single income source, basic expenses) are realistic to self-file. An accountant adds real value when: your trading profit is above £40,000 (extraction-strategy decisions matter), you have multiple income streams (PAYE + self-employment + property + dividends), you've crossed the £90,000 VAT threshold, you're considering incorporation, or you have an HMRC enquiry. Expect to pay £400-£1,500/year for a typical sole-trader accountant; the cost is itself a deductible expense.

How do payments on account work?+

When your Self Assessment tax bill exceeds £1,000 for the first time, HMRC requires payments on account toward NEXT year's tax. Half the current bill is due 31 January (alongside the current bill); the other half is due 31 July. So your first January after crossing the threshold can hit with a double-bill: last year's balance + first payment on account. Adjust via Form SA303 if you expect next year's income to drop substantially. Payments on account don't apply if more than 80% of your tax is collected via PAYE.

My company has £180,000 profits, what's my actual CT bill?+

Apply marginal relief formula. Standard 25% × £180,000 = £45,000 (gross CT before relief). Marginal relief = 3/200 × (£250,000 - £180,000) × (£180,000 ÷ £180,000) = 3/200 × £70,000 × 1 = £1,050. Net CT = £45,000 - £1,050 = £43,950. Effective CT rate: 24.4%. Verify against expected position: profits within band → effective rate between 19% (at £50k) + 25% (at £250k), trending up. £180k is in mid-band → effective rate ~24.4% as calculated. HMRC has an online marginal relief calculator at gov.uk/marginal-relief-calculator, use it for any period-specific computation.

Why is the effective marginal rate 26.5% in the band?+

Mathematical artefact of how the marginal relief formula works. The 3/200 fraction (= 1.5%) applies to the DIFFERENCE between upper limit + augmented profits. As profits rise by £1, the (Upper limit - Augmented profits) term reduces by £1, so the relief reduces by £1 × 3/200 = 1.5p. Combined with the 25% main rate applied to the additional £1, the marginal increase in CT is 25p + 1.5p = 26.5p. Strategy implication: profits in the band are taxed MORE heavily per pound than profits above the band. Companies often structure expenses, dividends, or pension contributions to either stay below £50k (19%) or push into the £250k+ range (25%), avoiding the 26.5% marginal zone where possible.

How do 'associated companies' affect the thresholds?+

The £50,000 SPR threshold + £250,000 main rate threshold are REDUCED for each associated company in the group, by dividing each threshold by (1 + number of associated companies). Example: company with 2 associated companies → 3 companies total in group → each company's effective SPR threshold = £50,000 / 3 = £16,667; each company's effective main rate threshold = £250,000 / 3 = £83,333. Definition of 'associated companies' is complex but broadly means companies under common control (the same individual or persons control all of them). Common in owner-managed group structures, holding company + subsidiary arrangements, and structures with multiple Ltd Co subsidiaries. ICAEW warned in 2025 that some companies have INCORRECTLY claimed full marginal relief without applying associated-company reductions, specifically targeted by HMRC's 2024-2025 compliance reviews.

Can I shift profits between years to avoid the 26.5% marginal band?+

Limited options. Profits are recognised on accruals basis (Ltd Cos can't use cash basis), so timing manipulation requires genuine commercial decisions, accelerating expenses (pension contributions, equipment purchases, repairs), accelerating salary/bonus payments before year-end, deferring income recognition where commercially appropriate. **Substantial pension contributions** are the most flexible single mechanism: a £100,000 employer pension contribution before year-end can pull a company from £180,000 profit (mid-band, 26.5% marginal) down to £80,000 profit (still in band but lower) or even below £50,000 SPR. **Accelerated capital expenditure** via Full Expensing (Ltd Co only, 100% on new main-rate plant) or AIA (£1m/year cap) similarly shifts deductions forward. **Salary/bonus to directors** crystallises personal income tax + employee NI but reduces CT, useful when personal-rate position is favourable.

Last reviewed: 23 May 2026