Corporation Tax Marginal Relief: Planning Around the 26.5% Band

Why 26.5% is higher than 25%

The marginal relief band creates a counterintuitive situation: companies with profits between £50,000 and £250,000 face a higher effective marginal rate on each additional pound than companies with profits above £250,000. The effective marginal rate in the band is 26.5% — compared to the 25% main rate above £250,000.

This happens because as profits increase within the band, marginal relief is progressively withdrawn. Each additional pound of profit in the band attracts 25% tax and also reduces the marginal relief by 3/200 × £1 = 1.5p, giving a combined rate of 26.5p.

The planning opportunity at £50,000

If your company profit is just above £50,000 — say £55,000 — consider whether you can reduce taxable profit to £50,000 or below. The tax saving of getting from £55,000 to £50,000:

• Tax at £55,000 (in marginal band): approximately £12,750 (applying the formula)
• Tax at £50,000 (small profits rate 19%): £9,500
• Saving: £3,250 on a £5,000 reduction in taxable profit — an effective rate of 65% on that £5,000

An employer pension contribution of £5,000 achieves this reduction and costs the company £5,000 to put £5,000 in your pension — while saving £3,250 in corporation tax. Net cost: £1,750 to put £5,000 in your pension.

The planning opportunity at the top of the band

Above £250,000, the rate falls to 25%. If you're at £248,000 and considering whether to take on more work, pushing profits above £250,000 is actually tax-efficient at the margin — you'd be trading 26.5% for 25%.

Associated companies: the hidden threshold problem

The £50,000 and £250,000 thresholds divide equally between associated companies. A director controlling two companies (e.g., a trading company and a holding company) has thresholds of £25,000 and £125,000 per company. This means the marginal relief band catches you at much lower profit levels.

If you have or are considering a holding company structure, the corporation tax implications should be factored into the decision — the tax savings from corporate structure must outweigh the reduced thresholds.