Corporation Tax Made Simple: Marginal Relief and How It Works

August 8, 2025

Corporation Tax can feel like a bit of a maze, especially with the recent legislation changes. Let’s break it down, so you can understand how the rules affect your business and where you might save some money.

 

The Basics: UK Corporation Tax Rates

For a while, the UK had one flat rate of Corporation Tax for everyone. That changed on 1 April 2023. Now we’re back to a tiered system:

  • 19% – for taxable profits up to £50,000 (Small Profits Rate)

  • 25% – for taxable profits over £250,000 (Main Rate)

  • Between £50,000 and £250,000 – you can claim Marginal Relief to smooth the jump from 19% to 25%.

 

Why Corporation Tax Isn’t Like Income Tax

With Income Tax, only the bit of income above the threshold gets taxed at the higher rate. Not so with Corporation Tax, cross the £50,000 profit mark and, without relief, the whole profit is taxed at the higher rate.

That’s where Marginal Relief steps in.

 

Marginal Relief in a Nutshell

If your profits fall between £50,000 and £250,000, Marginal Relief acts like a sliding scale, so your tax rate climbs gradually instead of jumping straight from 19% to 25%.

The simplified formula looks like this:

(Upper limit – taxable profit) × (Marginal Relief fraction)

Where:

  • Upper limit = £250,000

  • Marginal Relief fraction = 3/200

Example

L. Messi Ltd makes taxable profits of £150,000 in the year ending 31 March 2025.

  • Corporation Tax before relief: £150,000 × 25% = £37,500

  • Marginal Relief: (£250,000 – £150,000) × 3/200 = £1,500

  • Final tax bill: £37,500 – £1,500 = £36,000

That’s an effective tax rate of 24%.

Where That 3/200 Comes From

The fraction used in the Marginal Relief calculation (3/200) is not a random figure. It’s actually based on the tax rates and profit thresholds:

  • Tax on £50,000 at 19% = £9,500
  • Tax on £250,000 at 25% = £62,500
  • Difference in tax = £62,500 – £9,500 = £53,000
  • Spread over £200,000 of taxable profits (the range between £50,000 and £250,000) = 26.5%

The additional tax rate on profits in this band is 1.5% above the 25% Main Rate. Expressed as a fraction, 1.5% = 3/200.

Watch Out for the Effective Marginal Rate

Even with Marginal Relief, profits between £50,000 and £250,000 are effectively taxed at 26.5% – higher than the Main Rate. That’s why tax planning really matters if you’re in this range.

 

Capital Allowances: A Smart Planning Tool

One way to lower your Corporation Tax bill is to reduce taxable profits using capital allowances, especially if you’re close to the thresholds.

Example

C. Ronaldo Ltd was a Main Rate Corporation Taxpayer in 2024 and, during this period, carried out a training facility refurbishment. Following an assessment there was £270,000 in unclaimed capital allowances identified.

The below table details the tax savings realised based on two different levels of profits:

 

Before Capital Allowances
Taxable profits £300,000 £600,000
Tax due @ 25% £75,000 £150,000
After Capital Allowances
Taxable profits £300,000 £600,000
Less: Capital Allowances (£270,000) (£270,000)
Total £30,000 £330,000
Tax due @ 19% £5,700 –
Tax due @ 25% – £82,500
Tax Saving £69,300 £67,500

Interestingly, the saving on £300,000 of profits before capital allowances is £1,800 more than if the original profits had been £600,000, because the allowances reduced the profits to below the £250,000 Main Rate threshold.

 

The Takeaway

Understanding how the rates, thresholds, and reliefs work can make a real difference to your tax bill. If your profits hover near the thresholds, a strategic review of capital allowances could save you thousands.

 

Next Steps

Our team at Bonham & Brook has over 20 years of combined experience in capital allowances. Our experts help you maximise your tax savings and keep more of your hard-earned profits

Give us a call on 020 3523 9125 or email manthistle@bonhamandbrook.co.uk to get started.

 

Mark Anthistle

Capital Allowances Manager

Book a Meeting with Mark here

 

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