UK Marginal Corporation Tax

How does marginal corporation tax for business work?

Limited companies in the UK pay corporation tax on their net profits. UK marginal corporation tax consists of three different tax bands and rates. The tax rate is determined by the amount of a business’s net taxable profit. Companies with net profits of £50,000 and below pay 19% corporation tax. Those with net profits between £50,000 and £250,000 pay a corporation tax rate between 19% and 25% and companies with profits above £250,000 pay 25% tax. The marginal rate of tax is 26.5% and is paid on net profits between £50,000 and £250,000.

How does marginal rate relief work?

Marginal rate relief applies to profits between £50,000 and £250,000 and is calculated using a formula provided by HMRC. The formula is:

Standard fraction x (Upper limit – augmented profits) x amount of taxable profits ÷ augmented profits

As an illustration, assume a net profit of £60,000. The standard fraction is 3 ÷ 200. Applying this to the formula gives:

3 ÷ 200 x (250,000 – 60,000) x (60,000 ÷ 60,000) = £2,850 marginal relief

There are two options for calculating the corporation tax. You can multiply the net profit of £60,000 by 25%, which equals £15,000. Then deduct the marginal relief of £2,850, resulting in a tax liability of £12,150, or an effective tax rate of 20.25%.

Alternatively, you multiply £50,000 of the profit by 19%, which is £9,500. Multiplying the remaining profit of £10,000 by the marginal tax rate of 26.5%, results in marginal relief of £2,650. Adding both amounts gives a total tax of £12,150.

An easier way to calculate corporation tax is by using HMRC’s calculator which is available using the link below:

Calculate Marginal Relief for Corporation Tax – Calculate Marginal Relief for Corporation Tax – GOV.UK

Other examples: