Part of our complete guide to Corporation Tax.
Why marginal relief exists
UK Corporation Tax has two headline rates, a small profits rate for lower-profit companies and a higher main rate for larger ones. Without a transition mechanism, a company earning just over the small profits threshold would face a sudden jump to the main rate on its entire profit, a cliff-edge that would punish companies for growing by a small amount. Marginal relief smooths that cliff edge into a gradual taper.
The three zones
- Below £50,000 profit: the small profits rate applies to the whole amount, no marginal relief involved
- Between £50,000 and £250,000 profit: the main rate applies, but marginal relief reduces the effective amount due, tapering the rate up gradually across this band
- Above £250,000 profit: the main rate applies in full, with no relief
Key point: Marginal relief doesn't give you a special lower rate as such, it gives you a deduction calculated by formula that reduces your Corporation Tax bill below what applying the main rate to the whole profit would produce. The practical effect is an effective rate that climbs smoothly from just above the small profits rate to the full main rate as profit rises through the band.
A worked example
Take a company with £100,000 of taxable profit, sitting inside the marginal relief band. Rather than simply applying the main rate to the full £100,000, the calculation works out the main rate liability on the whole amount, then subtracts a marginal relief deduction based on a standard fraction applied to the difference between the £250,000 upper threshold and the actual profit. The practical result is that the effective tax rate on that £100,000 sits meaningfully below the headline main rate, closer to a blended rate reflecting where £100,000 falls within the £50,000-£250,000 band.
Associated companies shrink the band
If your company has associated companies, generally companies under common control, both the £50,000 and £250,000 thresholds are divided between them. Two associated companies share a combined £50,000 lower threshold and £250,000 upper threshold, effectively £25,000 and £125,000 each, not £50,000 and £250,000 each. This catches out group structures that weren't planned with Corporation Tax thresholds in mind.
Want the exact figure for your company? Book a free consultation, and if you have associated companies, we'll also check how the shared thresholds affect your group, as part of our limited company accounts service.
Frequently asked questions
What is marginal relief for Corporation Tax?
Marginal relief tapers the jump between the small profits rate and the main rate of Corporation Tax, applying to companies with profits between the two thresholds so the effective rate rises gradually rather than jumping suddenly.
At what profit level does marginal relief apply?
Marginal relief applies to profits between the small profits rate threshold of £50,000 and the main rate threshold of £250,000. Below £50,000 the small profits rate applies in full, above £250,000 the main rate applies in full.
Do the thresholds change if I have associated companies?
Yes, both the £50,000 and £250,000 thresholds are divided by the number of associated companies, so a group of companies under common control shares the lower-rate band rather than each one getting it in full.
Is marginal relief automatic?
Yes, HMRC's Corporation Tax calculation applies marginal relief automatically where it's due, based on the profit figure declared on the return, you don't need to make a separate claim.