Corporation Tax Rates and Marginal Relief Explained

Plenty of the growing companies we act for in Kent hit the same puzzle. Profits rise past £50,000, and the effective rate of corporation tax quietly starts climbing — but not all the way to 25%, and not in a way the headline rates seem to explain. The answer is marginal relief, and it is one of those things almost everyone searches for and almost nobody finds explained clearly. So here it is, with the arithmetic actually shown rather than asserted.

The two headline rates and the band in between

For the 2026/27 financial year, corporation tax works in three zones:

• Profits up to £50,000 — taxed at the small profits rate of 19%.
• Profits of £250,000 or more — taxed at the main rate of 25% on the whole amount.
• Profits between £50,000 and £250,000 — the marginal relief band, where the effective rate slides from 19% up towards 25%.

The mistake people make is assuming that crossing £50,000 flips the whole profit to 25%. It does not. The marginal band exists precisely to smooth the jump, so your effective rate rises gradually as profits grow.

How marginal relief actually works — the maths

In the marginal band, the calculation is done in two steps. First, tax the whole profit at the main rate of 25%. Then subtract marginal relief, calculated with HMRC’s standard fraction of 3/200:

Marginal relief = 3/200 × (£250,000 − your profits)

Let us run it for a company with £100,000 of profits:

1. Tax at 25%: £100,000 × 25% = £25,000.
2. Marginal relief: 3/200 × (£250,000 − £100,000) = 0.015 × £150,000 = £2,250.
3. Corporation tax due: £25,000 − £2,250 = £22,750.

That is an effective rate of 22.75% — sitting neatly between the 19% and 25% bookends, exactly as intended. Run the same sum at £60,000 of profit and you get corporation tax of £12,150, an effective rate of 20.25%. The closer your profits are to £250,000, the closer the effective rate creeps to 25%.

The bit that surprises people: the marginal rate is 26.5%

Here is the counter-intuitive part. While the effective rate across all your profits stays between 19% and 25%, the rate you pay on each extra pound earned within the band is 26.5% — higher than the 25% main rate itself. That is because every additional pound of profit not only gets taxed but also shrinks your marginal relief. Earn £1 more and you pay 25p of tax on it and lose 1.5p of relief: 26.5p in total.

This is genuinely useful to know. If your profits are sitting in that £50,000–£250,000 band, a pound of deductible spending or pension contribution saves you 26.5p of corporation tax — more than it would above £250,000. Year-end planning has more leverage in the marginal band than anywhere else.

Associated companies shrink the thresholds

If you control more than one company, watch this closely. The £50,000 and £250,000 limits are divided by the number of associated companies. Two associated companies and each one’s small-profits limit drops to £25,000 and its upper limit to £125,000. So a company you thought was comfortably in the 19% zone can find itself in the marginal band — or straight onto the main rate — simply because you also own another company. Anyone running a group, a holding company, or a separate company for a second venture needs to factor this in.

Short and long accounting periods

The thresholds assume a standard 12-month accounting period. If your period is shorter (common in a company’s first year or after a change of year-end), the £50,000 and £250,000 limits are pro-rated accordingly. A six-month period, for instance, halves them to £25,000 and £125,000. It is an easy thing to overlook when a company’s dates are non-standard, and it can pull a modest profit into the marginal band unexpectedly.

What this means in practice

A few planning points fall straight out of the mechanics:

• Timing capital expenditure. Bringing forward genuine, planned equipment spend into a year where profits sit in the marginal band relieves it at up to 26.5% — see our capital allowances post.
• Timing pension contributions. An employer pension contribution in a marginal-band year is especially efficient. More in our company pension contributions post.
• Year-end reviews matter more. When every extra pound of profit is taxed at 26.5%, the value of a pre-year-end planning conversation is at its highest.

This post covers the rates and relief; for deadlines, payment dates and how to actually pay the bill, see our existing corporation tax post. And if you are deciding how much profit to draw versus leave in the company, read it alongside how to pay yourself as a director in 2026/27.

How MCC Partners can help

We help limited companies across Gravesend, Dartford, Medway and the wider Kent area understand exactly where they sit on the corporation tax scale, plan spending and contributions to make the most of the marginal band, and get the associated-company position right before it causes an unwelcome surprise. If your profits are growing, a short review now can save more than it costs.

Figures and tax rules are correct as at the date of writing (November 2026) and reflect the 2026/27 financial year. Tax rules change — and with a new Chancellor and an Autumn Budget expected, some may change again. Please check the current position or speak to us before acting on anything in this article.