If your limited company makes more than £50,000 in profit but less than £250,000, you don't pay 19% and you don't pay 25%. You pay something in between, and the mechanism that gets you there is called marginal relief.
It catches a lot of directors out. People see the headline 25% main rate, panic, and assume their whole profit is taxed at that rate the moment they cross £50,000. That's not how it works. The 25% only bites in full once profits top £250,000.
This guide explains exactly what happens in that middle band, shows you the formula HMRC uses, and walks through the maths with real FY2025 figures so you can sanity-check your own bill. We've written it for limited company directors and founders who want to understand the number on their CT600, not just accept it.
What are the corporation tax rates for FY2025?
Since 1 April 2023, there's no single flat rate. Non-ring-fence company profits sit in one of three zones.
| Augmented profits (FY2025) | Rate that applies |
|---|---|
| £50,000 or less | Small profits rate of 19% |
| £50,001 to £250,000 | Main rate of 25%, reduced by marginal relief |
| Over £250,000 | Main rate of 25% in full |
These rates and limits apply for both Financial Year 2025 (1 April 2025 to 31 March 2026) and Financial Year 2026. The small profits rate is 19% and the main rate is 25%, with the lower limit at £50,000 and the upper limit at £250,000.
A quick note on the word "financial year". Corporation tax runs on financial years that start on 1 April, which is different from the personal tax year that starts on 6 April. FY2025 means the year beginning 1 April 2025.
What is corporation tax marginal relief?
Marginal relief is a deduction that smooths the jump between 19% and 25%. Without it, a company on £50,001 of profit would suddenly owe far more tax than one on £50,000, just for earning a single extra pound. That cliff edge would be unfair, so HMRC tapers the rate instead.
Here's the mental model. The taxman starts by charging the full 25% main rate on all your profit. Then it hands back a slice, the marginal relief, which is largest just above £50,000 and shrinks to nothing as you approach £250,000.
The result is a sliding effective rate. At £50,000 you're effectively paying 19%. At £250,000 you're effectively paying 25%. Everywhere in between, you pay a blended rate that climbs gradually.
One important term: the limits are tested against your "augmented profits", which means your taxable trading profits plus most dividends received from companies that aren't part of your group. For a typical owner-managed company with no investment income, augmented profits and taxable profits are the same number.
What is the marginal relief formula?
HMRC calculates the relief using a set fraction. For FY2025 and FY2026 the marginal relief standard fraction is 3/200, which is the same as 1.5%.
The full formula is:
Marginal relief = (Upper limit − Augmented profits) × (Taxable profits ÷ Augmented profits) × 3/200
That middle bracket looks fiddly, but for most owner-managed companies it equals 1, because taxable profits and augmented profits are identical. When that's the case, the formula simplifies to:
Marginal relief = (£250,000 − Profits) × 1.5%
You then work out tax in two steps:
- Charge the full main rate: profits × 25%.
- Subtract the marginal relief.
The figure left over is your corporation tax bill.
Worked example: a company with £150,000 profit
Illustrative example. Northgate Joinery Ltd is a trading company with taxable profits of £150,000 for the year to 31 March 2026. It has no associated companies and no investment income, so its augmented profits are also £150,000.
Step one, the full main rate:
£150,000 × 25% = £37,500
Step two, the marginal relief:
(£250,000 − £150,000) × 1.5% = £100,000 × 0.015 = £1,500
Step three, the final bill:
£37,500 − £1,500 = £36,000
So Northgate Joinery pays £36,000. That's an effective corporation tax rate of £36,000 ÷ £150,000 = 24%, comfortably below the 25% headline.
The table below shows how the effective rate climbs across the band. Each row assumes a standalone trading company with no investment income, using the FY2025 limits.
| Taxable profit | Tax at 25% | Marginal relief | Tax payable | Effective rate |
|---|---|---|---|---|
| £50,000 | £12,500 | £3,000 | £9,500 | 19.00% |
| £100,000 | £25,000 | £2,250 | £22,750 | 22.75% |
| £150,000 | £37,500 | £1,500 | £36,000 | 24.00% |
| £200,000 | £50,000 | £750 | £49,250 | 24.63% |
| £250,000 | £62,500 | £0 | £62,500 | 25.00% |
Notice the top row. At exactly £50,000 the relief is (£250,000 − £50,000) × 1.5% = £3,000, which drags the effective rate back down to 19%, lining up perfectly with the small profits rate. The taper does its job.
Why is the real marginal rate 26.5%?
Here's the part that surprises directors. Although the effective rate on your whole profit stays below 25%, the tax on each extra pound you earn inside the band is higher than 25%.
Every additional £1 of profit is charged at the 25% main rate. But that same £1 also reduces your marginal relief by 1.5p, because the relief formula shrinks as profits rise. Add the two together and each marginal pound costs you 26.5p in tax.
That 26.5% marginal rate matters for planning. If your profits are nudging just over £50,000, a deductible cost, like an employer pension contribution or a piece of qualifying equipment, can be worth more than you'd expect, because it's saving tax at 26.5% rather than 19%. A quick run through our corporation tax services page is usually where we start when a company first lands in this band.
How do associated companies change the limits?
This is the trap that catches group structures and serial founders.
The £50,000 and £250,000 limits are not per company in isolation. They're shared across all your associated companies. Broadly, two companies are associated if one controls the other, or both are under common control.
You divide both limits by the total number of associated companies, including the company you're calculating for. So if your company has three associated companies, that's four companies in total, and the limits drop to:
- Lower limit: £50,000 ÷ 4 = £12,500
- Upper limit: £250,000 ÷ 4 = £62,500
That can pull a company into the marginal band, or even up to the full 25% rate, far sooner than its standalone profits would suggest. Dormant companies and certain holding structures can sometimes be left out of the count, but the rules are detailed, so it's worth checking carefully. This is a common reason a limited company sees a higher bill than its director expected.
What about short accounting periods?
If your accounting period is shorter than 12 months, both limits are reduced proportionately.
For a six-month period, for example, the limits halve to £25,000 and £125,000. New companies often hit this in their first year, because the first set of accounts frequently covers a period that isn't a neat 12 months. It's something we flag early for any startup we onboard, so the first corporation tax bill doesn't come as a shock.
Who cannot claim marginal relief?
Marginal relief isn't available to everyone in the £50,000 to £250,000 band. You can't claim it if your company is:
- A non-UK resident company.
- A close investment-holding company.
- A company whose augmented profits exceed the upper limit (you simply pay the 25% main rate in full).
If none of those apply and your profits sit in the band, the relief is given automatically when the return is worked out correctly.
Want to make sure your CT600 gets the rate right? Our accountants handle marginal relief, associated company reviews and the full return as standard. Talk to a Zmartly accountant and we'll make sure you're not overpaying or underclaiming.
Frequently asked questions
Does marginal relief apply automatically or do I have to claim it?
It's applied when your corporation tax is calculated correctly on the return, rather than being a separate box you tick. That said, the calculation depends on getting your augmented profits and associated company count right, so errors here are common when companies file without an accountant.
What is the effective corporation tax rate in the marginal band?
It rises gradually from 19% at £50,000 of profit to 25% at £250,000. A standalone company with £150,000 of profit and no investment income pays an effective rate of 24% for FY2025.
Is the marginal rate really 26.5%?
Yes, on each extra pound earned inside the band. Every additional £1 of profit is taxed at the 25% main rate and also strips away 1.5p of relief, giving a 26.5% rate on that marginal pound, even though the effective rate across your whole profit stays below 25%.
How do associated companies affect marginal relief?
The £50,000 and £250,000 limits are divided by the total number of associated companies, including the one you're calculating for. Three associated companies means four in total, so the limits fall to £12,500 and £62,500, which can push a company into the marginal band or up to the full main rate.
What are the corporation tax limits for FY2025?
The lower limit is £50,000 and the upper limit is £250,000 for FY2025 and FY2026. The small profits rate is 19%, the main rate is 25%, and the marginal relief standard fraction is 3/200.
