If your company’s profits are growing, you might find yourself stuck in the middle ground – too big for the small profits rate, but not quite up at the main rate level.
That’s where marginal relief comes in. It’s designed to smooth the jump between the 19% and 25% corporation tax rates, so the increase is more gradual.
Let’s break down how it works in practice.
The basic corporation tax bands
For the financial years 2024 and 2025:
- Profits up to £50,000 – taxed at the small profits rate of 19%
- Profits over £250,000 – taxed at the main rate of 25%
- Profits between £50,000 and £250,000 – taxed at 25% but reduced by marginal relief
The effect of marginal relief is to move you gradually from 19% up towards 25%, rather than jumping straight to the main rate the moment you cross £50,000.
Associated companies and shorter periods
The £50,000 and £250,000 limits don’t always apply in full.
They are divided by the number of associated companies plus one, and pro-rated if your accounting period is less than 12 months.
For example, if your company has one associated company, the limits become:
- Lower profits limit: £50,000 ÷ (1 + 1) = £25,000
- Upper profits limit: £250,000 ÷ (1 + 1) = £125,000
So, if you’ve got multiple companies under common control, it’s really important to factor that into your planning.
The marginal relief formula
HMRC use a set formula to calculate marginal relief:
F × (U – A) × N / A
Where:
- F = marginal relief fraction
- U = upper profits limit
- A = augmented profits for the accounting period
- N = total taxable profits for the accounting period
The marginal relief fraction (F) for the financial year 2025 is 3/200, unchanged from 2024.
This formula reduces your overall corporation tax bill and gives you an effective tax rate somewhere between 19% and 25%.
What are “augmented profits”?
This is where it can get a bit technical. Augmented profits are your taxable profits plus certain qualifying exempt distributions that aren’t excluded.
These qualifying exempt distributions can include:
- Dividends
- Distributions of assets
- Amounts treated as a distribution on a transfer of assets and liabilities
- Certain bonus issues following a repayment of share capital
However, some distributions are excluded from augmented profits, such as those received from:
- A 51% subsidiary
- A company of which the recipient is a 51% subsidiary
- A trading company or relevant holding company that is a quasi-subsidiary of the recipient
If your company doesn’t receive qualifying exempt distributions, then augmented profits = taxable profits.
In that simpler case, the formula reduces to:
F × (U – A)
Which makes the calculation a bit easier.
HMRC’s marginal relief calculator
You don’t have to crunch all the numbers by hand.
HMRC provide an online marginal relief calculator on Gov.uk which lets you:
- Enter your figures
- Factor in associated companies
- See the marginal relief and effective tax rate for your profits
It’s a handy tool if you want to sense-check your own calculations or quickly estimate your likely bill.
Example – marginal relief in action
Let’s look at a straightforward example.
A Ltd prepares accounts to 31 March each year.
For the year to 31 March 2025, it has:
- Taxable profits: £80,000
- No qualifying exempt distributions, so augmented profits are also £80,000.
We’ll use:
- F = 3/200
- U = £250,000
- A = £80,000
- N = £80,000
First, calculate marginal relief:
Marginal relief = 3/200 × (250,000 – 80,000) × 80,000 / 80,000
= 3/200 × 170,000 × 1
= £2,550
Without marginal relief, corporation tax at 25% would be:
£80,000 × 25% = £20,000
After marginal relief, the company’s corporation tax bill is:
£20,000 – £2,550 = £17,450
This gives A Ltd an effective corporation tax rate of 21.81% – between the small profits rate of 19% and the main rate of 25%.
Why this matters for planning
If your company’s profits sit between the lower and upper limits, understanding marginal relief can help you:
- Forecast your tax bill more accurately
- Plan dividends and bonuses with tax in mind
- Understand how associated companies impact the thresholds
- Make better decisions about group structure and profit allocation
It’s especially important if your profits are close to the limits and you’re weighing up investment, bonuses or pension contributions.
Need help with marginal relief and corporation tax?
The rules around marginal relief, associated companies and augmented profits can feel like a bit of a maze.
If you’d like clarity on:
- Your effective corporation tax rate
- Whether marginal relief applies to your company
- How your group structure affects the limits
…then get in touch with Jon and the team at Jon Davies Accountants and we’ll walk you through the numbers, explain the options in plain English and help you plan your corporation tax bill with confidence.
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Any questions?
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- You can ring us on 0151 380 8080
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