Corporation Tax Marginal Relief in 2025/26: How It Works (With Full Examples)

If your company makes between £50,000 and £250,000 in profits, you are not paying 19% Corporation Tax.

You are also not paying a simple flat 25%.

Instead, you fall into the Corporation Tax marginal relief band, where the effective tax rate gradually increases from 19% to 25%.

Many directors are surprised when their accountant tells them their effective rate is 21%, 23% — or even 24% — instead of 19%.

In this guide, we explain:

• The Corporation Tax rates for 2025/26
• How marginal relief actually works
• Why 26.5% appears in calculations
• The impact of associated companies
• Practical planning opportunities

What Is the Corporation Tax Rate in 2025/26?

For companies with accounting periods ending in the 2025/26 tax year:

• 19% if taxable profits are up to £50,000
• 25% if taxable profits exceed £250,000
• Marginal relief applies between £50,000 and £250,000

These thresholds apply to standalone companies with no associated companies.

If profits fall between £50,000 and £250,000, the company does not jump directly from 19% to 25%. Instead, marginal relief smooths the increase.

Why Is the Marginal Band So Confusing?

Because companies in the marginal band are initially taxed at 26.5%, and then marginal relief is deducted.

This leads many directors to ask:

“Why am I paying 26.5% Corporation Tax?”

The answer is: you’re not — but that rate is used in the calculation.

The marginal relief formula is:

F × (U – A)

Where:

• F = 3/200
• U = upper limit (£250,000 for standalone companies)
• A = augmented profits

This formula reduces tax back down from 26.5% to an effective rate between 19% and 25%.

Step-by-Step Example: £100,000 Profit

Assume:

• Standalone company
• No associated companies
• No dividend income
• Taxable profit = £100,000

Step 1: Tax at 26.5%

£100,000 × 26.5% = £26,500

Step 2: Calculate Marginal Relief

3/200 × (£250,000 – £100,000)
= 3/200 × £150,000
= £2,250

Step 3: Deduct Marginal Relief

£26,500 – £2,250 = £24,250

Effective Tax Rate

£24,250 ÷ £100,000 = 24.25%

So although the headline rate above £50,000 is 25%, the effective rate at £100,000 is actually 24.25%.

What Happens at Different Profit Levels?

Here’s how the effective rate changes across the band:

The rate gradually increases until it reaches the full 25% at £250,000.

This creates a “sliding scale” effect.

What Are Augmented Profits?

Augmented profits include:

• Taxable profits
• Plus dividends received from non-group companies

For most owner-managed companies without external investments, augmented profits equal taxable profits.

However, if your company receives dividend income from investments, this can increase augmented profits and reduce marginal relief.

This is a frequently overlooked issue.

What Are Associated Companies?

This is where many directors are caught out.

If your company has associated companies, the £50,000 and £250,000 thresholds are divided.

An associated company is broadly one under common control — including:

• Companies owned by the same individual
• Companies owned by close family members
• Certain group structures

Example: One Associated Company

If there is 1 associated company:

• Lower limit becomes £25,000
• Upper limit becomes £125,000

Now the marginal band is much narrower.

If each company makes £100,000:

They are deep inside the marginal band and may face a higher effective rate than expected.

This is particularly relevant for:

• Property companies held separately
• Family company structures
• “Side project” limited companies

Example: Two Companies Owned by Same Director

Director owns:

• Trading company: £120,000 profit
• Property company: £40,000 profit

Total associated companies = 1

New thresholds:

• Lower limit: £25,000
• Upper limit: £125,000

The trading company at £120,000 is now near the top of the marginal band and close to 25%.

Without associated company rules, it would have more room before reaching the upper limit.

This can significantly change tax exposure.

Planning Around Marginal Relief

Because the rate increases gradually, planning becomes important around threshold points.

1. Pension Contributions

Employer pension contributions reduce taxable profit.

If profit is just above £50,000, reducing profit below that threshold restores the full 19% rate.

2. Bonuses vs Dividends

A director bonus:

• Reduces company profit
• May save Corporation Tax at a marginal band rate
• But creates personal Income Tax and NIC

The combined impact must be modelled carefully.

3. Timing of Income

If profit is near £250,000, deferring income into the next accounting period may avoid full exposure to 25%.

4. Short Accounting Periods

If an accounting period is less than 12 months, thresholds are time-apportioned.

For example, a 6-month period halves the £50,000 and £250,000 limits.

This is often missed during company incorporations or year-end changes.

Why Corporation Tax Feels Higher Than Before

Before April 2023, most companies paid a flat 19%.

Now:

• Profits above £50,000 begin moving toward 25%
• Associated company rules accelerate exposure
• Dividend income can reduce relief
• Complexity has increased significantly

Many profitable SMEs are now paying effective rates of 23–25%.

Should You Leave Profits in the Company?

With higher Corporation Tax rates, some directors ask whether retaining profits is still efficient.

Consider:

• Corporation Tax at up to 25%
• Dividend tax at up to 33.75% in higher rate band
• Potential future tax increases
• Investment returns inside the company

Extraction vs retention requires holistic modelling.

Common Mistakes With Marginal Relief

We frequently see:

• Directors assuming a flat 25% rate
• Ignoring associated companies
• Overlooking dividend income impact
• Missing time-apportionment rules
• Failing to plan near the £50k threshold
• No year-end tax planning

A simple pre-year-end review can often reduce the effective rate.

Final Answer: What Corporation Tax Rate Will You Pay in 2025/26?

If your company’s profits are:

• Up to £50,000 → 19%
• Between £50,000 and £250,000 → sliding effective rate between 19% and 25%
• Above £250,000 → 25%

If you have associated companies, those thresholds are divided.

Because the marginal band can result in effective rates above 24%, active tax planning is now essential for profitable companies.

If your company regularly earns more than £50,000 per year, an annual Corporation Tax review is advisable before the year-end.

Individual circumstances vary and professional advice should be taken before implementing planning strategies.