Corporation Tax Small Profits Rate in 2026: Full Guide

Corporation tax was substantially reformed in April 2023, introducing a tiered rate structure that replaced the flat 19% rate that had applied since 2017. For 2026/27, the same structure continues. Whether you are running a small service business or a growing technology company, understanding exactly where your profits fall — and what that means in pounds — is essential for tax planning.

The 2026/27 Corporation Tax Rates at a Glance

These thresholds apply to the accounting period. If your accounting period is less than 12 months, the thresholds are proportionally reduced.

The Small Profits Rate: 19% Below £50,000

For companies with augmented profits (taxable profits plus exempt dividends received from other companies) of £50,000 or less, the entire profit is charged at 19%.

Example: A small consultancy with £42,000 taxable profit pays:

• Corporation tax: £42,000 × 19% = £7,980
• Effective rate: 19%

This is straightforward. The complexity begins when profits creep above £50,000.

The Main Rate: 25% Above £250,000

For companies with augmented profits exceeding £250,000, the entire profit is charged at 25%. There is no banding — once you cross £250,000, the full amount attracts the higher rate.

Example: A technology company with £300,000 taxable profit pays:

• Corporation tax: £300,000 × 25% = £75,000
• Effective rate: 25%

Marginal Relief: The Complex Middle Ground

The most important planning consideration is the band between £50,000 and £250,000 where marginal relief applies. Marginal relief reduces your corporation tax bill from what it would be at the full 25% rate.

The Formula

HMRC's marginal relief formula is:

Marginal Relief = (Upper Limit − Augmented Profits) × Standard Fraction

Where:

• Upper Limit = £250,000 (or lower if associated companies apply)
• Standard Fraction = 3/200

Step-by-Step Calculation

Example: Company with £100,000 taxable profit

1. Calculate tax at 25%: £100,000 × 25% = £25,000
2. Apply marginal relief: (£250,000 − £100,000) × 3/200 = £150,000 × 0.015 = £2,250
3. Corporation tax payable: £25,000 − £2,250 = £22,750
4. Effective rate: 22.75%

Example: Company with £180,000 taxable profit

1. Tax at 25%: £180,000 × 25% = £45,000
2. Marginal relief: (£250,000 − £180,000) × 3/200 = £70,000 × 0.015 = £1,050
3. Corporation tax payable: £45,000 − £1,050 = £43,950
4. Effective rate: 24.4%

The 26.5% Marginal Rate Explained

The standard fraction of 3/200 produces a marginal rate on the next pound of profit — above the 25% nominal rate — of 26.5%. This is because earning an extra £1 in the marginal band costs you 25p in corporation tax AND reduces your marginal relief by £0.015 (3/200), giving a total cost of £0.265.

This has real planning implications. Profits of £100,001 cost marginally more per pound of tax than profits of either £49,999 or £250,001. Consider:

• Accelerating deductible expenditure (e.g., equipment purchases via AIA) into years where profits fall in the marginal band
• Pension contributions: employer pension contributions are deductible — contributing £50,000 to a director's pension can move profits from the marginal band to below £50,000, saving tax at 26.5%
• Timing of income: if you have a choice when to invoice, consider whether straddling a year-end moves profits between bands

Associated Companies: Dividing the Thresholds

This is where many owner-directors are caught out. If you control two or more companies, HMRC divides the £50,000 and £250,000 thresholds by the number of associated companies.

What Makes a Company "Associated"?

A company is associated with yours if you (or connected persons including close family) control both. "Control" means more than 50% of voting rights, ordinary share capital, or the right to distributions.

Impact of Association

Example: You own two companies. Company A makes £48,000 profit. Without association, this would be taxed at 19% (£9,120). With association, the small profits limit is £25,000. Company A pays: 25% on £48,000 = £12,000, less marginal relief = (£125,000 − £48,000) × 3/200 = £77,000 × 0.015 = £1,155. Tax = £10,845. Effective rate: 22.6% — significantly higher than the 19% a standalone company would pay.

HMRC guidance on associated companies is at HMRC CTM03500.

R&D Tax Credits and Corporation Tax

Research and Development (R&D) tax credits interact directly with your corporation tax position.

Under the post-April 2023 merged R&D scheme, qualifying R&D expenditure is enhanced. For most companies in 2026/27:

• Additional deduction of 20% above the 100% standard deduction (giving 120% total deduction)
• For R&D-intensive SMEs under ERIS (Enhanced R&D Intensive Support), a payable credit of 27p per £1 of qualifying spend is available for loss-making periods

If you claim R&D relief, your taxable profits will be lower — potentially moving you from the marginal band into the small profits band. This compounds the benefit: not only do you get the enhanced deduction, but the remaining profits are taxed at a lower rate.

Dividend Strategy and Corporation Tax

For owner-managed companies, the total tax on extracted profits depends on the interplay between corporation tax and dividend tax. The key insight:

• Retaining profits in the company: taxed at 19–25%
• Extracting via dividends: additional dividend tax of 8.75% (basic rate), 33.75% (higher rate)
• Combined effective tax on extracted profits: approximately 26–37% depending on rates and personal income

If your company consistently earns profits in the 19% band, extracting via dividends at the basic rate gives a combined rate of roughly 26% — competitive with other structures. As profits rise into the marginal and main rate bands, the combined burden increases.

When Your Accounting Period Is Short

If your company's accounting period is less than 12 months (common in the first year of trading), the thresholds are time-apportioned. A nine-month period has:

• Small profits limit: £50,000 × 9/12 = £37,500
• Main rate threshold: £250,000 × 9/12 = £187,500

Always check the effective period length when planning around the thresholds.

Corporation Tax Payment Deadlines

For companies with profits below £1.5m, corporation tax is due nine months and one day after the end of the accounting period. For companies above £1.5m, quarterly instalment payments apply.

Late payment attracts interest at HMRC's current late payment rate (currently 7.25% as of 2026 — worth checking at HMRC interest rates).

Practical Summary

For most small owner-managed companies in 2026/27, the key takeaways are:

1. Keep profits below £50,000 where possible (through pension contributions, equipment investment, or timing) to remain in the 19% band
2. Be aware of the 26.5% marginal rate if profits sit between £50,000 and £250,000 — this affects return on investment decisions
3. Check for associated company status — an unrelated dormant company from a previous venture can still affect your thresholds
4. Use R&D credits if you do qualifying development work — they reduce taxable profits and therefore your corporation tax bill

Calculate your exact corporation tax position using our calculator below.