Corporation tax between £50,000 and £250,000: marginal relief worked, and what an associated company does to the limits

A director rings to say the company made £140,000 this year and asks why the tax bill is not simply 25% of that. The answer is marginal relief, and it is one of the few corporation tax calculations a practice can do in a single line. It also changes quietly when the client owns a second company, which is where estimates tend to go wrong.

The rates for the 2026 financial year

The Finance Act 2025 sets the corporation tax main rate at 25% for the financial year 2026 (1 April 2026 to 31 March 2027), and sets the standard marginal relief fraction at 3/200ths. GOV.UK's rates page gives the rest:

• Profits of £50,000 or less pay the small profits rate of 19%.
• Profits above £250,000 pay the main rate of 25%.
• Profits between the two pay the main rate, reduced by marginal relief.

The £50,000 and £250,000 limits are reduced in proportion for an accounting period shorter than 12 months, and for the number of associated companies.

The formula

For a company whose profits are all taxable profits, with no exempt distributions received, the relief is:

Marginal relief = 3/200 × (upper limit − profits)

The tax is then 25% of profits, less the relief. Where a company does receive certain exempt distributions, the legislation uses "augmented profits" in the sum, so check that before applying the short version. For most owner-managed companies, the short version is the right one.

Six profit levels worked

At £50,000 the formula lands exactly on 19% (£9,500), and at £250,000 it lands exactly on 25%, so there is no jump at either end.

The 26.5% band

Between the limits, tax rises from £9,500 to £62,500. That is £53,000 of extra tax over £200,000 of extra profit, which is 26.5%. Each additional £1 of profit in the band costs 25p at the main rate plus 1.5p of relief lost (3/200 of £1). A client weighing a bonus, a pension contribution or a piece of equipment spending at £120,000 of profit is really deciding at 26.5%, not 25%. That is worth a sentence in any year-end planning email.

What an associated company does

GOV.UK says the limits are reduced in proportion to the number of associated companies, and gives its own example: with three other associated companies the limits are divided by four, giving £12,500 and £62,500. With one other company they are divided by two, so £25,000 and £125,000.

Take a company with £60,000 of profit.

Alone. Tax at 25% is £15,000. Relief is 3/200 × (£250,000 − £60,000) = £2,850. Tax is £12,150, which is 20.25%.

With one associated company. The upper limit is £125,000. Tax at 25% is still £15,000. Relief is 3/200 × (£125,000 − £60,000) = £975. Tax is £14,025, which is 23.375%.

The second company costs this one £1,875 more. The test is not whether the companies trade together: the definition of an associated company is wider than most clients expect, so ask early whether a client's other companies, dormant or not, or those of connected people, could count. Our reading of GOV.UK's pages is that the definition itself sits in the legislation and HMRC's manual, which this guide did not read, so treat the reduction above as the mechanics and confirm the status of each company before you quote a figure.

The deadline that goes with it

For profits up to £1.5 million, GOV.UK says to pay corporation tax 9 months and 1 day after the end of the accounting period. A year ending 31 March 2027 is due on 1 January 2028; a year ending 31 December 2026 is due on 1 October 2027. If the date falls on a weekend or bank holiday, GOV.UK says to make sure the payment reaches HMRC on the last working day before it, unless you pay by Faster Payments. Our guide to corporation tax return late filing penalties covers the filing date, which is 12 months after the year end and not the payment date.

A short checklist for each company client

1. What are the profits for the period, and is the period 12 months?
2. Does the client control other companies, now or at any point in the period?
3. Has the company received exempt distributions that change "augmented profits"?
4. Is the payment date diarised, 9 months and 1 day after the year end?
5. If the client is a director who also takes dividends, does the tax bill sit alongside the dividend tax rise for 2026 to 2027 in the cash plan?

If a client cannot pay on the day, our guide to payment plans and the £30,000 limit explains the Self Assessment route; for a company bill, ask HMRC before the date passes.

Overlyft builds AI staff who join your team and run the profit, associated company and deadline check for each company client at year end, producing a one-page estimate for you to review before it goes to the director.

This is general information, not tax advice. Check GOV.UK and the client's own figures before you advise.