Corporation Tax Marginal Relief — How the 19% to 25% Bands Work for Trade Companies (2026)

The Two Corporation Tax Rates Since April 2023

Before April 2023, all companies paid Corporation Tax at a single rate of 19% regardless of profit. That changed. There are now two statutory rates and a Marginal Relief mechanism that bridges the gap between them.

• Small profits rate — 19%: applies where profits are at or below the £50,000 lower limit.
• Main rate — 25%: applies where profits are £250,000 or more.
• Marginal Relief: applies to profits between £50,000 and £250,000, tapering the effective rate up from 19% toward 25%.

The headline point most directors miss is what happens in that middle band. Because Marginal Relief tapers the rate, the tax on the slice of profit between £50,000 and £250,000 is charged at an effective marginal rate of 26.5% — higher than the 25% main rate itself. That is not a typo: the design of the relief means the band between the two limits is the most expensive money your company earns.

Why the Marginal Rate is 26.5%

It feels counter-intuitive that the slice between £50,000 and £250,000 is taxed at 26.5% when the top rate is only 25%. Here is the logic. A company at exactly £50,000 pays 19% — that is £9,500. A company at exactly £250,000 pays 25% — that is £62,500. The difference between those two bills is £53,000, spread across £200,000 of additional profit. £53,000 divided by £200,000 is 26.5%. So every extra £1,000 of profit earned while you sit inside the band costs £265 in Corporation Tax. Once you pass £250,000, the whole profit is taxed at a flat 25% and the marginal rate drops back to 25%.

This matters because it changes the value of reducing your profit. A pension contribution or a piece of capital expenditure that pulls profit down within the £50k–£250k band saves tax at 26.5%, not 19% or 25%. For trade companies in this band, deductible spending is unusually tax-efficient.

The Marginal Relief Formula

You do not calculate the band as a flat 26.5% directly on your return. Instead HMRC charges the main 25% rate on all profits and then deducts Marginal Relief. Conceptually the relief is:

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

The Upper Limit is £250,000, the Marginal Relief Fraction is 3/200, and where a company has no exempt distributions its Profits and Augmented Profits are the same figure (so the final fraction is just 1). The result is subtracted from the 25% headline charge. The net effect reproduces the 19%-to-25% taper described above — the formula is simply how the legislation gets there.

A Worked Example — £100,000 Profit

Take a Ltd electrical contractor with taxable profits of £100,000, no associated companies and no exempt distributions. Step by step:

• Corporation Tax at the main rate: £100,000 × 25% = £25,000.
• Marginal Relief: (£250,000 − £100,000) × 3/200 = £150,000 × 0.015 = £2,250.
• Corporation Tax payable: £25,000 − £2,250 = £22,750.

That £22,750 on £100,000 of profit is an effective rate of 22.75% — sitting neatly between the 19% floor and the 25% ceiling, exactly as the taper intends. You can sense-check it the other way: the first £50,000 is effectively at 19% (£9,500) and the next £50,000 at the marginal 26.5% (£13,250), which together come to £22,750. Both methods agree.

Associated Companies — The Big Trap

The £50,000 and £250,000 limits assume one standalone company. If your company has associated companies, both limits are divided by the total number of associated companies (including the company itself). This is the single most common way trade company directors end up paying more tax than they expected.

A company is generally associated with another where one controls the other, or both are under the control of the same person or group of persons. So if you own two trading companies — say a building company and a separate property or plant-hire company — you have two associated companies, and the limits are halved:

• One company: lower limit £50,000, upper limit £250,000.
• Two associated companies: lower limit £25,000, upper limit £125,000 each.
• Three associated companies: lower limit £16,667, upper limit £83,333 each.

The practical effect is that a second company can push your main trading company into the marginal band — or up to the full 25% main rate — much sooner. Dormant companies are generally ignored, but an active company you set up for a side venture counts. Before incorporating a second company, it is worth modelling the Corporation Tax cost of splitting your limits. The simplicity of one structure sometimes saves more tax than the new venture appears to gain.

Short Accounting Periods

The £50,000 and £250,000 limits assume a full 12-month accounting period. If your company has a short accounting period — common in the first year of trading, or when you change your year-end — both limits are proportionately reduced.

For example, a 6-month accounting period halves the limits to £25,000 and £125,000; a 9-month period reduces them to £37,500 and £187,500. A new company that incorporates partway through a year and trades hard from day one can therefore hit the marginal band on what looks like a modest annualised profit, simply because its first period is short. Factor this in when you set your accounting reference date.

What "Augmented Profits" Means

The limits and the relief formula are tested against augmented profits, not just your taxable trading profit. Augmented profits are your taxable total profits plus certain exempt distributions received from companies that are not part of your group — in practice, certain dividends from non-group, non-associated companies.

For most independent trade companies this distinction makes no difference: a builder or electrician who does not hold shares in other unconnected trading companies will have augmented profits equal to taxable profits, so the final fraction in the formula is 1. But if your company holds investments that pay dividends, those receipts can lift your augmented profits, push you closer to the upper limit, and reduce the Marginal Relief you get. It is a detail worth flagging to your accountant if your company holds any external shareholdings.

Why This Matters to Incorporated Trade Businesses

A great many profitable sole-trader trades that have incorporated now land in the £50,000–£250,000 profit band — the zone where the marginal 26.5% rate bites. A Ltd company builder turning over £400,000 with £120,000 of profit, or an electrical firm clearing £90,000, is paying real money in the taper rather than the headline 19% many directors still assume applies.

Because the marginal slice is taxed at 26.5%, two things are true. First, every pound of legitimate, deductible spend that reduces profit within the band is worth 26.5p of tax saved — better than at either statutory rate. Second, the gap between Corporation Tax and the eventual personal tax on extracting profit (via dividends) is narrower than it used to be, which sharpens the salary-versus-dividend and pension decisions below.

Planning Points for Trade Company Directors

Employer Pension Contributions

Company pension contributions are an allowable business expense and reduce taxable profit. For a company in the marginal band, a contribution into the director's pension can save Corporation Tax at the 26.5% marginal rate while moving money into a tax-advantaged wrapper. This is frequently the single most efficient way for a trade company director to extract value when profits sit between £50,000 and £250,000.

Timing of Income and Expenditure

Where you have genuine flexibility, the timing of invoicing and of deductible expenditure across your year-end can move profit between periods and keep more of it below £50,000 or out of the higher reaches of the band. Bringing forward a planned tool, vehicle or equipment purchase, or the date you invoice a large job, can change which rate applies. This must always reflect commercial reality — not artificial timing — but the levers are real.

Salary and Dividend Mix

How you pay yourself affects company profit. Director salary is a deductible expense that reduces Corporation Tax, while dividends are paid from post-tax profit and do not reduce it. The optimal mix depends on your personal tax position, the National Insurance picture and your company's profit level. For a company straddling the marginal band, modelling salary, dividends and pension together — rather than in isolation — is what produces the best overall outcome.

Capital Allowances

Vans, plant, tools and qualifying equipment can attract capital allowances that reduce taxable profit, often in the year of purchase. For a marginal-band company, claiming the right allowances against a 26.5% effective rate is more valuable than the same claim would be at 19%. Keep clean records of asset purchases so your accountant can maximise the claim.

Quick Reference: Effective Corporation Tax Rates 2026

Figures assume a 12-month accounting period and no associated companies. Associated companies and short periods reduce the limits, which changes the rate that applies at any given profit level.

A Note on Figures and Getting Advice

The rates, limits and Marginal Relief Fraction set out here apply for 2026, but tax figures can and do change at fiscal events such as the Budget. The thresholds are also not currently linked to inflation, so more companies drift into the marginal band over time. Treat this guide as a framework for understanding how the bands work — not as a substitute for a calculation on your own numbers.

Marginal Relief, associated company tests, augmented profits and the interaction with salary, dividends and pensions get complicated quickly. Before you make decisions on company structure, profit extraction or large expenditure, run the actual figures past a qualified accountant who can apply the current rules to your specific position.