Marginal relief explained

What is marginal relief?

Since April 2023, UK corporation tax operates a two-rate system:

• 19% on profits up to £50,000 (the Small Profits Rate).
• 25% on profits over £250,000 (the Main Rate).
• Marginal relief applies to profits between £50,000 and £250,000 — it tapers the effective rate between 19% and 25%.

The practical effect is that your effective corporation tax rate increases gradually as profits rise from £50,000 to £250,000, rather than jumping straight from 19% to 25%.

The marginal relief formula

Marginal relief is calculated as:

Marginal relief = Fraction × (Upper Limit − Profits) × (Profits ÷ Augmented Profits)

Where:

• Fraction is 3/200 (set by HMRC for the 2023+ rates).
• Upper Limit is £250,000 (divided by the number of associated companies).
• Profits is your taxable profit.
• Augmented Profits is profits plus exempt distributions (dividends from non-group companies).

For most small businesses without associated companies or exempt distributions, this simplifies to:

Marginal relief = 3/200 × (250,000 − Taxable profit)

Example calculation

A company has taxable profits of £120,000. There are no associated companies.

• Corporation tax at 25%: £120,000 × 25% = £30,000
• Marginal relief: 3/200 × (250,000 − 120,000) = 3/200 × 130,000 = £1,950
• Corporation tax payable: £30,000 − £1,950 = £28,050
• Effective rate: 23.375%

How AccBooks calculates marginal relief

AccBooks calculates marginal relief automatically based on:

1. Your estimated taxable profit (from the running P&L, adjusted for capital allowances and non-deductible items).
2. The number of associated companies you’ve entered under Settings → Corporation tax.
3. Whether the accounting period is less than 12 months (which prorates the limits).

The effective rate and marginal relief amount are shown on the Corporation tax dashboard, updated in real time.

Short accounting periods

If your accounting period is less than 12 months (e.g., for a newly incorporated company), HMRC prorates the profit limits. A 6-month period has limits of £25,000 (lower) and £125,000 (upper).

AccBooks detects short periods automatically from your Settings → Company → Financial year dates.

Associated companies impact

Associated companies reduce the profit limits. If you have one associated company, the limits halve to £25,000 and £125,000. With two associated companies, they become £16,667 and £83,333.

Enter your associated companies at Settings → Corporation tax → Associated companies. AccBooks applies the correct limits automatically.

Planning implications

Marginal relief creates an effective marginal rate of 26.5% on profits between £50,000 and £250,000. This is slightly higher than the main 25% rate, which has implications for dividend planning and profit extraction. Your accountant can model different profit-extraction scenarios using AccBooks’ tax planning module.

When marginal relief doesn’t apply

Marginal relief is not available if:

• The company is a close investment holding company.
• The company has elected to be treated as a non-UK resident.
• The accounting period straddles April 2023 (transitional rules apply — AccBooks handles the split-period calculation).