What Is Marginal Relief? [Everything You Need to Know]

Marginal Relief is a Corporation Tax relief that prevents your company’s tax bill from jumping sharply when its profits move above the £50,000 small profits threshold. 

If you're a limited company director, understanding how Marginal Relief works can help you work out how much Corporation Tax your company has to pay. 

The calculation can become more complicated if you have associated companies, a short accounting period, or certain types of investment income, so it's important to understand which rules apply to your particular company. 

Here’s what you need to know.

Key points

• Your thresholds can be lower if you have associated companies ⚠️
  The £50,000 and £250,000 limits are divided between associated companies, which can bring your business into the Marginal Relief range sooner than expected.
• Your accounting period affects the thresholds 📅
  The £50,000 and £250,000 limits apply to a 12-month accounting period. If your accounting period is shorter, the thresholds are reduced proportionally.
• The calculation may depend on more than your taxable profit 🧮
  Marginal Relief uses both taxable profits and augmented profits, which can include certain exempt dividends or distributions. The rules are often more complicated for close investment holding companies.
• Maintain up-to-date bookkeeping with ANNA 🚀
  ANNA keeps your income and expenses organised, so you can stay on top of your Corporation Tax position and plan for your bill with ease.

How does Marginal Relief work?

Marginal Relief is a Corporation Tax adjustment that reduces the tax you pay when your company’s profits fall between the small profits threshold and the main rate threshold. 

Corporation Tax in the UK operates on two rates:

• Small profits rate: 19% on profits of £50,000 or less
• Main rate: 25% on profits of £250,000 and above

Without Marginal Relief, a single pound of extra profit could trigger thousands of pounds in additional tax. 

To prevent that, Marginal Relief increases your Corporation Tax gradually from 19% to 25%, with relief reducing as profits get closer to the upper limit. 

🧠 Good to know

If your accounting period is shorter than 12 months, both thresholds are reduced proportionally. A six-month accounting period, for example, would halve them to £25,000 and £125,000. This is important to note if you’ve recently incorporated or changed your year-end. 

How is Marginal Relief calculated?

The calculation uses your company's taxable profits and its augmented profits, which are your taxable profits plus certain dividends or other distributions your company receives that are exempt from Corporation Tax. For most companies, these two figures are the same.

In the 2026 financial year, the standard Marginal Relief fraction is 3/200.

The basic formula is:

Marginal Relief = 3/200 × (£250,000 − augmented profits) × (taxable profits ÷ augmented profits)

You then deduct the result from the Corporation Tax calculated at the 25% main rate.

Marginal Relief calculation example

Suppose your company has no associated companies, has a 12-month accounting period, and makes £100,000 of taxable profits.

If you applied the 25% main rate without Marginal Relief, the Corporation Tax would be:

£100,000 × 25% = £25,000

Assuming your augmented profits are also £100,000, the Marginal Relief calculation would be:

3/200 × (£250,000 − £100,000) × (£100,000 ÷ £100,000)

That gives you £2,250 of Marginal Relief.

Your Corporation Tax would therefore be:

£25,000 − £2,250 = £22,750

So although the main Corporation Tax rate is 25%, your company has an effective Corporation Tax rate of 22.75% on £100,000 of profits.

The more profit you make, the less Marginal Relief you get, and your effective tax rate grows closer to 25%.

🧠 Good to know

You don't have to work out the figures manually. HMRC provides a Marginal Relief calculator, and most accounting software applies the relief automatically once you enter your profits and associated companies.

The 26.5% effective marginal rate

Marginal Relief has a counterintuitive aspect you need to be aware of. 

Within the relief band, each additional pound of profit is subject to an effective marginal rate of 26.5%.

That's because as profits increase, you lose relief at 1.5p per £1 on top of the 25% main rate. As a result, if you earn £200,000, you pay a higher rate on each additional pound of profit than a company earning £300,000. 

If your profits are approaching the £250,000 upper threshold, it can be useful to review your position before the end of your accounting period. You could bring forward any deductible spend you were already planning, or make sure legitimate costs you’ve incurred are recorded before year-end. 

Associated companies and their impact on your thresholds

If your company has any associated companies, the £50,000 and £250,000 thresholds are divided equally between them. This can significantly reduce the level of profits taxed at 19% and bring companies into the Marginal Relief band much earlier.

For example, when you have one associated company, the thresholds are reduced to £25,000 and £125,000 per company. So a company earning £60,000 that would pay 19% on most of its profits as a standalone entity could find itself paying noticeably more once a connected company is taken into account. 

HMRC divides both thresholds by the total number of companies (including yours). This prevents groups from splitting profits across multiple entities to stay below the limits.

The rules around what counts as an associated company are specific, and getting the count wrong is one of the most common errors on a CT600 form. 

HMRC determines association based on control. Companies under the control of the same person, including connected relatives, can count as associated. Dormant companies are excluded.

💡 Did you know? 

ANNA's Auto Accountant tracks your income as it comes in, so you're never surprised when it's time to calculate your Corporation Tax position. Keep your records tidy throughout the year, and you'll know where you stand long before your bill is due.

Who can't claim Marginal Relief?

HMRC has different rules for companies whose main purpose is to hold investments rather than carry on a trade. These are called close investment holding companies, and they don't qualify for the small profits rate or Marginal Relief. Instead, they usually pay Corporation Tax at the main rate of 25%.

This can include companies that hold shares or let property to connected people.

If your company lets property commercially to unconnected tenants, you're likely still eligible, but the rules can be difficult to apply, and HMRC does challenge incorrectly filed returns. 

If your company's income is mainly passive, check with an accountant before assuming Marginal Relief applies. 

How to claim Marginal Relief

You claim Marginal Relief through your CT600 form. There's a specific box for it, and most accounting software will calculate and enter the figure automatically based on your profit figure and the number of associated companies you declare.

If you underclaim Marginal Relief, you'll overpay. You can amend your return within 12 months of the original filing deadline to correct the issue and claim a refund, but it ties up cash in the meantime. 

Overclaiming is the bigger risk. The penalty for this error depends on whether HMRC views it as careless, deliberate, or deliberate and concealed. In any case, late payment interest runs from the date the tax was originally due.

If you believe HMRC issued a penalty wrongfully, you can appeal it. You have 30 days from the date on the penalty notice to appeal in writing, stating your name, Unique Taxpayer Reference, the figures you believe to be correct, and the way you arrived at them. 

If HMRC doesn't change its decision, you can request an independent review, which typically takes 45 days, and escalate to the tax tribunal afterwards if needed. 

If you're filing your own return and your situation involves associated companies, investment income, or a short accounting period, it's a good idea to speak to an accountant first.

Don’t forget the deadlines

Whatever Marginal Relief reduces your bill to, you need to pay your Corporation Tax nine months and one day after the end of your accounting period. This deadline is separate from the CT600 filing deadline of 12 months after the period ends. 

How ANNA helps you stay on top of Corporation Tax

Marginal Relief is easier to manage when you have accurate figures throughout the year. ANNA brings your bookkeeping and tax information together, so you can keep track of your company's position as you go.

You can use ANNA to:

• Track your income and expenses in your business account, and have a clear view of your taxable profit
• Capture receipts as you spend, so you have records to support your expenses
• Get real-time tax estimates as your figures change and plan for your Corporation Tax bill
• Set money aside with Smart Pots, so your tax money stays separate from day-to-day spending
• Create and track invoices, and always keep your income records complete
• Prepare and file your Corporation Tax return, with ANNA handling the calculations and submitting it to HMRC
• Prepare and file your VAT returns, and easily stay on top of your VAT obligations
• File your personal Self Assessment tax return alongside your business finances
• Manage payroll, calculate employee wages, and keep accurate records
• Access 24/7 UK-based support when you have any tax-related questions

Register with ANNA today and get on top of your Corporation Tax.