Corporation Tax in the UK: Main Rate, Small Profits Rate, and Marginal Relief Explained

Corporation Tax is one of the most important taxes affecting UK limited companies. Since April 2023, the UK has operated a tiered Corporation Tax system, meaning companies may pay different rates depending on their level of profits. Understanding how the main rate, small profits rate, and marginal relief work is essential for effective tax planning and avoiding unexpected liabilities.

In this guide, we break down the current Corporation Tax rates, explain how marginal relief bridges the gap between thresholds, clarify what “augmented profits” mean in practice, and share practical planning tips to help you manage your company’s tax position efficiently.

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Corporation Tax Rates in the UK

The UK currently applies two main Corporation Tax rates:

Small Profits Rate – 19%

Companies with profits of £50,000 or less pay Corporation Tax at 19%.

This lower rate is designed to support small businesses and early-stage companies by reducing their tax burden.

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Main Rate – 25%

Companies with profits over £250,000 pay Corporation Tax at 25%.

This applies to larger or more profitable companies and represents the highest Corporation Tax rate in the UK.

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What Happens Between £50,000 and £250,000?

If your company’s profits fall between £50,000 and £250,000, you do not simply choose one rate or the other. Instead, you pay Corporation Tax at the main rate (25%) and then receive marginal relief, which reduces the effective rate.

This creates a gradual increase in tax rather than a sudden jump from 19% to 25%.

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How Marginal Relief Works

Marginal relief is a mechanism that smooths the transition between the small profit rate and the main rate.

In simple terms:

• Profits up to £50,000 → taxed at 19%
• Profits over £250,000 → taxed at 25%
• Profits between these limits → effective rate between 19% and 25%

Instead of applying two separate rates to different portions of profit, HMRC uses a formula to calculate the relief amount, reducing the total Corporation Tax bill.

Why This Matters

Marginal relief ensures that companies just above £50,000 are not immediately pushed into paying 25% on all profits, which could otherwise discourage growth.

However, because marginal relief is formula-based, it can be difficult to estimate your final tax bill without proper calculations—making professional advice valuable.

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What Are “Augmented Profits”?

When calculating marginal relief, HMRC does not look only at your company’s taxable trading profits. They consider augmented profits, which broadly include:

• Taxable trading profits
• Certain types of investment income (for example, interest or rental income within the company)

This means a company with modest trading profits but significant investment income could be pushed into a higher effective Corporation Tax band.

Practical Example

• Trading profit: £45,000
• Investment income: £15,000

Total augmented profits = £60,000

Even though the trading profit alone is under £50,000, the marginal relief rules apply because the augmented profits exceed the lower threshold.

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Associated Companies and the Thresholds

If you control more than one company, the £50,000 and £250,000 thresholds are shared between them.

Example:

• Two associated companies
• Lower threshold becomes £25,000 each
• Upper threshold becomes £125,000 each

This can significantly change which rate applies and is a common area of confusion.

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Why Understanding These Rules Is Important

Misunderstanding Corporation Tax bands can lead to:

• Underestimating your tax bill
• Cash flow problems
• Unexpected balances due
• Missed planning opportunities

Good awareness allows you to forecast liabilities and make smarter business decisions.

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Planning Tips to Manage Corporation Tax

While tax avoidance is illegal, tax planning is legitimate and encouraged. Here are practical ways to manage your Corporation Tax position.

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1. Time Your Income Where Possible

If your business has flexibility over when invoices are raised or income is recognised, timing can affect which accounting period profits fall into.

Spreading income sensibly across periods may help keep profits within a lower band.

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2. Bring Forward Allowable Expenses

Claiming legitimate business expenses reduces taxable profit. Examples include:

• Equipment and tools
• Software subscriptions
• Professional fees
• Marketing costs
• Staff training

Ensure expenses are wholly and exclusively for business purposes.

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3. Capital Allowances and Investment

Purchasing qualifying assets can attract capital allowances, reducing taxable profits.

Investment in equipment, IT, and machinery can often be more tax-efficient than leaving profits unused.

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4. Director Remuneration Strategy

Balancing salary and dividends can help manage overall tax exposure.

The right mix depends on:

• Company profits
• Personal tax position
• National Insurance implications

This is an area where tailored advice is essential.

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5. Pension Contributions

Employer pension contributions are generally deductible for Corporation Tax purposes and can be an efficient way to extract value while reducing taxable profits.

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6. Review Profit Levels Before Year-End

A year-end tax review allows you to:

• Estimate Corporation Tax liability
• Identify planning opportunities
• Avoid surprises

Waiting until after year-end often removes many planning options.

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Common Corporation Tax Mistakes to Avoid

• Assuming all companies pay 19% or 25%
• Ignoring marginal relief
• Forgetting investment income affects augmented profits
• Missing filing and payment deadlines
• Poor record-keeping
• Not seeking advice before major financial decisions

These errors can lead to penalties, interest, and unnecessary taxes.

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How IR Advisory Helps

At IR Advisory, we support limited companies with:

• Corporation Tax calculations and returns
• Marginal relief assessments
• Year-end tax planning
• Director of remuneration planning
• Capital allowance claims
• Ongoing compliance and HMRC correspondence

Our aim is to ensure you pay the right amount of tax—no more, no less—while remaining fully compliant.

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Final Thoughts

The UK’s tiered Corporation Tax system means understanding rates is no longer optional. Knowing where your company sits between 19% and 25%, and how marginal relief works, allows you to plan ahead and make informed decisions.

With the right advice and proactive planning, Corporation Tax becomes a manageable part of your business strategy rather than an unwelcome surprise.

If you’d like tailored guidance, IR Advisory is here to help.