Corporation Tax Marginal Relief 2026/27: Full Guide with Worked Examples

Since April 2023, UK corporation tax has operated on a two-rate system. Small companies with profits up to GBP 50,000 pay 19%, while larger companies with profits above GBP 250,000 pay 25%. Between those two thresholds lies the marginal relief band, where a taper formula gradually increases the effective rate. Understanding how this works -- and how associated companies can shrink your thresholds -- is essential for tax planning in 2026/27.

The Two-Rate System

The corporation tax rates for 2026/27 are unchanged from 2023/24:

These limits apply to a standard 12-month accounting period. If your period is shorter, the limits are pro-rated proportionally -- a nine-month period would have limits of GBP 37,500 and GBP 187,500 respectively.

How Marginal Relief Is Calculated

For companies with augmented profits between GBP 50,000 and GBP 250,000, the starting point is to calculate the tax at the full 25% main rate, then subtract the marginal relief.

The marginal relief formula is:

Marginal relief = (3 / 200) x (upper limit - augmented profits)

Where the upper limit is GBP 250,000 (or the pro-rated equivalent for short periods).

Augmented profits means taxable profits plus any franked investment income (dividends from non-group companies). For most small businesses, augmented profits equal taxable profits.

Main Worked Example: GBP 150,000 Profits

A company has taxable profits of GBP 150,000 for the year ending 31 March 2027.

Step 1 -- Tax at 25% main rate: GBP 150,000 x 25% = GBP 37,500

Step 2 -- Marginal relief: (3 / 200) x (GBP 250,000 - GBP 150,000) = (3 / 200) x GBP 100,000 = GBP 1,500

Step 3 -- Net corporation tax: GBP 37,500 - GBP 1,500 = GBP 36,000

Step 4 -- Effective rate: GBP 36,000 / GBP 150,000 = 24%

Additional Examples

At GBP 60,000 profits:

• Tax at 25% = GBP 15,000
• Marginal relief = (3/200) x (GBP 250,000 - GBP 60,000) = (3/200) x GBP 190,000 = GBP 2,850
• Net tax = GBP 12,150
• Effective rate = 20.25%

At GBP 250,000 profits:

• Tax at 25% = GBP 62,500
• Marginal relief = (3/200) x (GBP 250,000 - GBP 250,000) = GBP 0
• Net tax = GBP 62,500
• Effective rate = 25%

The 26.5% Marginal Rate Trap

An important planning point is that the marginal relief band creates an effective marginal rate of 26.5% on each additional pound of profit between GBP 50,000 and GBP 250,000. This is higher than the 25% headline rate.

This happens because as profits increase within the band, each extra pound not only attracts 25% corporation tax but also reduces the marginal relief available. The combined effect is a 26.5% marginal rate on profits in this zone.

Practical implication: if your company's profits are likely to fall in the GBP 50,000 to GBP 250,000 band, making additional pension contributions or capital expenditure before the year end could bring profits into the 19% zone and avoid the 26.5% marginal rate.

Associated Companies: Divided Limits

The profit thresholds of GBP 50,000 and GBP 250,000 are divided by the number of associated companies. This is the area that catches many business owners off guard.

Two companies are associated if one controls the other, or if both are controlled by the same person or group. Control is broadly defined and includes indirect control through connected persons.

Threshold Table: Impact of Associated Companies

Sarah's Example: Two Associated Companies

Sarah owns two trading companies -- a consulting firm and a property management company. Both are under her sole control and therefore associated with each other.

Each company's thresholds are GBP 25,000 (lower) and GBP 125,000 (upper).

If each company makes GBP 80,000 profit:

• GBP 80,000 is above the lower limit of GBP 25,000, so neither pays 19% flat
• GBP 80,000 is below the upper limit of GBP 125,000, so marginal relief applies
• For each company: tax at 25% = GBP 20,000; relief = (3/200) x (GBP 125,000 - GBP 80,000) = (3/200) x GBP 45,000 = GBP 675; net tax = GBP 19,325; effective rate = 24.16%

If the businesses were structured differently -- say as divisions of one company -- the GBP 250,000 upper threshold would apply to combined profits of GBP 160,000, potentially giving a lower effective rate. But non-tax factors usually drive structural decisions more than corporation tax thresholds.

Short Accounting Periods

If your accounting period is less than 12 months, both profit limits are scaled down proportionally. A nine-month period uses:

• Lower limit: GBP 50,000 x (9/12) = GBP 37,500
• Upper limit: GBP 250,000 x (9/12) = GBP 187,500

This matters when you incorporate mid-year or change your accounting date.

Tax Planning in the Marginal Relief Band

If your profits are likely to land in the GBP 50,000 to GBP 250,000 band, consider these approaches before the year end:

• Pension contributions: employer pension contributions are deductible and can bring profits below GBP 50,000. At the 26.5% marginal rate, a GBP 10,000 pension contribution saves GBP 2,650 in corporation tax.
• Capital expenditure: full expensing allows 100% deduction on qualifying plant and machinery in the year of purchase. Timing a purchase before the year end can reduce taxable profits materially.
• Timing income: where possible, deferring invoice dates to the next accounting period shifts income and its associated tax liability forward by a year.
• Dividend timing: dividends paid to shareholders reduce distributable profits but do not reduce taxable profits -- so salary and pension are more tax-efficient for reducing the corporation tax bill than dividends.

Our corporation tax calculator lets you enter your company profits, accounting period length, and number of associated companies to calculate your marginal relief and effective corporation tax rate for 2026/27. It also shows the impact of pension contributions and other deductions on your tax bill.