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How does marginal relief work?

A sliding cut to the 25% rate.

If your profit is between the two limits, you work out tax at 25% and then take off some relief. The relief shrinks as profit grows, so your overall rate climbs gradually from 19% to 25%.

Published

At a glance

Applies to
A with profit over £50,000 and not over £250,000, for 12 months with no
How it works
With no dividends or other received: tax at 25%, less 3/200 of the gap between your profit and the
What it means
With none received, each extra £1 of profit between the limits costs 26.5p in tax
Who cannot claim
A company that is not UK resident, or a

Sources

This entry is general information for directors of UK private limited companies, not advice about a particular company.

What to do

  1. Find your limits. Start with £50,000 and £250,000. Cut them if your is shorter than 12 months. Divide them if you have .

  2. Find the profit to test. This is your plus certain , such as dividends, your company received from other companies. It is called your augmented profit.

  3. Check you are between the limits. applies if that profit is over the and not over the upper limit. Your company must also be UK resident and not a close investment-holding company.

  4. Work out tax at 25% on your taxable profit.

  5. Take off the relief. Use the formula below. HMRC's online calculator gives an indication. It asks for your period's dates, your profit, any distributions from companies outside your , and any associated companies.

Sources

How it works

You pay 25%, less a cut that shrinks as profit grows

For the year starting 1 April 2026, the is 25% and the is 19%. If your profit is between the lower and upper limits, you work out tax at 25%. Then you take off marginal relief.

If you received no dividends or other , the relief is 3/200 of the gap between your profit and the . As your profit rises, the gap shrinks, so the relief shrinks too.

For example

Say Bramley Studio Ltd's profit for 2026 is £100,000. It received no dividends or other distributions and has no associated company.

Tax at 25%
£100,000 × 25%
£25,000
Marginal relief
3/200 × (£250,000 − £100,000)
−£2,250
Tax to pay
£22,750

That is 22.75% of the profit, between 19% and 25%.

Sources

The detail The exact rule

applies if the company is in the accounting period, is not a close investment-holding company in the period, its augmented profits exceed the lower limit but do not exceed the upper limit, and its augmented profits include no ring fence profits (Corporation Tax Act 2010, section 18B(1)). The tax charged on taxable total profits is then reduced by (F × (U − A)) × (N ÷ A). F is the standard marginal relief fraction, U the upper limit, A the augmented profits and N the taxable total profits. The formula is an image on legislation.gov.uk; HMRC's manual gives it in words (CTM03925).

Where profits exceed the upper limit, the whole of the is charged at the main rate (CTM03905). The main rate is 25% for the 2026 and 2027 (Finance Act 2025, section 13; Finance Act 2026, section 11). HMRC's rates table shows 25%, 19%, £50,000, £250,000 and 3/200 for each financial year from 2023 to 2026.

Sources

Where the 3/200 comes from

Parliament sets the for each year. It is 3/200 for the years starting 1 April 2026 and 1 April 2027.

HMRC's manual shows why it is that size. Tax at the upper limit is 25% of £250,000, which is £62,500. Tax at the is 19% of £50,000, which is £9,500. So the £200,000 between the limits carries £53,000 of tax. That is 26.5p for each £1.

26.5% is 1.5 points more than the 25% main rate. 1.5% written as a fraction is 3/200.

Our working, with no dividends or other distributions received: each extra £1 of profit adds 25p of tax at the main rate. It also shrinks the relief by 3/200 of £1, which is 1.5p. So each extra £1 between the limits costs 26.5p.

  • Profit

    £50,000 (lower limit)

    Tax at 25%
    £12,500
    Less relief
    £3,000
    Tax to pay
    £9,500
    Overall rate
    19%

  • Profit

    £150,000

    Tax at 25%
    £37,500
    Less relief
    £1,500
    Tax to pay
    £36,000
    Overall rate
    24%

  • Profit

    £250,000 (upper limit)

    Tax at 25%
    £62,500
    Less relief
    £0
    Tax to pay
    £62,500
    Overall rate
    25%

Our working, for 12 months with no and no dividends or other distributions. At exactly £50,000 you pay 19%. The formula gives the same £9,500, so there is no jump in tax as you pass the lower limit. At £150,000, £9,500 plus 26.5% of the £100,000 above the lower limit is also £36,000.

Sources

Cutting the limits does not change the 3/200

Your limits are divided if you have associated companies. They are cut if your period is shorter than 12 months. Both limits are cut in the same proportion.

Our working: the upper limit is always five times the lower limit. So the gap between them is always four times the lower limit. At the lower limit, the formula's relief is 3/200 of that gap. That is 3/200 × 4, or 6/100. So the relief is 6% of the lower limit.

That 6% is exactly the difference between 25% and 19%. So tax at the lower limit always comes to 19%, and the same 3/200 works whatever the size of the limits.

For example

Say Bramley Studio Ltd has one associated company, so its limits are £25,000 and £125,000. Our working applies the formula at £25,000.

Tax at 25%
£25,000 × 25%
£6,250
Relief at the lower limit
3/200 × (£125,000 − £25,000)
−£1,500
Tax
£4,750

That is 19% of £25,000, the same rate as at the full limits.

Sources

Dividends you receive shrink the relief

The profit tested against the limits is your . This is your taxable profit plus certain distributions, such as dividends, your company received from other companies.

Those distributions are not part of your taxable profit, so the 25% is not charged on them. But they raise your augmented profit, which shrinks the gap to the upper limit. The formula also scales the relief by your taxable profit divided by your augmented profit.

For example

In HMRC's example, a company with no associated company has £90,000 profit for the period to 30 September 2026, plus £8,000 of distributions that count.

Tax at 25%
£90,000 × 25%
£22,500
Marginal relief
3/200 × (£250,000 − £98,000) × (£90,000 ÷ £98,000)
−£2,094
Tax to pay
£20,406

Our working: with no distributions, the relief would be £2,400.

Sources

The detail Which distributions count

Augmented profits are taxable total profits plus any received by the company that are not excluded (Corporation Tax Act 2010, section 18L). A distribution is excluded if it comes from a of the company, or of a company of which the company is itself a 51% subsidiary, or from a trading company or relevant holding company that is a quasi-subsidiary of the company. HMRC's manual lists dividends, distributions of assets, amounts treated as a distribution on the transfer of assets or liabilities, and bonus issues following a repayment of share capital. It says these are not excluded if the income is from companies that are not in the same group (CTM03915). If the company received none, A equals N and the last part of the formula is 1.

Sources

Short periods and associated companies cut the limits

For a period shorter than 12 months, both limits are cut in proportion. HMRC's example counts months, but says the exact sum should count the days in the period.

With associated companies, divide both limits by the number of companies, counting yours. A short period then cuts them again.

For example

In HMRC's example, a company has £55,000 profit for 9 months, 1 January to 30 September 2024. Its limits become £37,500 and £187,500.

Tax at 25%
£55,000 × 25%
£13,750.00
Marginal relief
3/200 × (£187,500 − £55,000)
−£1,987.50
Tax to pay
£11,762.50

HMRC's sum uses months. It says the exact sum should use days.

HMRC's pages on this do not say which number of days to divide by. HMRC's online calculator asks for your period's start and end dates, so use it to check your figure.

Sources

The detail Short periods

Section 18D(4): for an of less than 12 months the lower limit and the upper limit are proportionately reduced. HMRC's manual (CTM03930) scales the limits by 9/12 for a nine-month period and notes that strictly the calculation should be carried out by reference to the number of days in the short accounting period rather than months. Neither section 18D nor HMRC's manual pages on short periods, periods and apportionment (CTM03930, CTM03955, CTM01405) say which number of days to divide by. Section 1172 of the Corporation Tax Act 2010 requires apportionments to different periods to be made on a time basis, but does not say whether it governs this reduction of the limits. With associated companies, HMRC says the divided figures are proportionately reduced for a period under 12 months (CTM03935).

Sources

Who cannot claim it

You cannot claim marginal relief if your company is not UK resident, or is a . Nor can you if your profit, including distributions from unrelated companies, goes over the upper limit.

HMRC says a that only holds investments, such as a bank deposit account, is a close investment-holding company. It pays the main rate on all its profit.

Sources

Consequences

If you get it wrong

Your company works out its own tax bill in its . The return includes a declaration that it is correct and complete, to the best of the knowledge of the person making it.

If you miss relief you are due, you pay more than you need to. If you claim it when you cannot, you pay too little. HMRC may charge interest on tax not paid on time.

Sources

Less common situations

Your accounting period crosses 1 April. The profit is split by days between the two . The rates, limits and are the same for the years starting 1 April 2025, 2026 and 2027. On our working, the split does not change your tax.

Your company stops trading part-way through a year. Its ends when it stops. That period is shorter than 12 months, so its limits are cut in proportion.

Sources

Worked example: Bramley Studio Ltd

Bramley Studio's own profit for 2026 is £27,500. That is below £50,000, so it pays 19% and does not arise.

For this example, say its for 1 January to 31 December 2026 is £80,000 instead. It is , trades, has no associated company and received no dividends or other distributions.

The rates, limits and are the same for the years starting 1 April 2025 and 1 April 2026. Our working: the profit is still split by days, but working the whole year as one gives the same tax.

Sources

Corporation Tax on £80,000

  • Taxable profit

    £80,000.00

    For this example. No dividends or other distributions, so this is also the profit tested

  • Tax at the main rate

    £20,000.00

    £80,000 × 25%

  • Less marginal relief

    −£2,550.00

    Over £50,000 and not over £250,000. 3/200 × (£250,000 − £80,000)

  • Tax to pay

    £17,450.00

    An overall rate of 21.81%, rounded

Sources

Check at 26.5p for each £1 (our working)

  • Tax on the first £50,000

    £9,500.00

    £50,000 × 19%

  • Tax on the next £30,000

    £7,950.00

    £30,000 × 26.5%

  • Tax to pay

    £17,450.00

    The same as above

Sources

Not covered here

of oil and gas companies, how is worked out, and which companies count as associated. See which rate your company pays, owning another company and a period that crosses 1 April.

Where this comes from

53 official sources. Open a group to see them.

The law 25 sources
HMRC 19 sources
GOV.UK 9 sources

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