Most online Corporation Tax calculators will tell you a company with £150,000 taxable profit owes 25% - £37,500. That's wrong. The correct figure is £33,750. The difference is £3,750, and it exists because of a relief that's been active since April 2023 and is still widely misunderstood: Corporation Tax marginal relief.

The three-band CT structure

Since 1 April 2023, UK Corporation Tax operates in three distinct bands. The rate you pay depends on your taxable profit for the accounting period:

Taxable Profit Rate What applies
Up to £50,000 19% Small profits rate (full benefit)
£50,001 – £250,000 19–25% Marginal relief band, sliding scale
Over £250,000 25% Main rate, no marginal relief

The critical point: the 25% main rate applies to the full profit only once you're above £250,000. In the band between £50k and £250k, you get marginal relief - a deduction that smooths the transition between the two rates.

The marginal relief formula

HMRC's formula for Corporation Tax in the marginal relief band is:

Marginal Relief Formula (s19 CTA 2010)
Start with: 25% × taxable profit
Less: Marginal Relief fraction × (upper limit − taxable profit)
= Corporation Tax due

The marginal relief fraction is 3/200. The upper limit (absent any associated companies) is £250,000. So for a company with £150,000 taxable profit, the calculation runs:

Worked Example - £150,000 Profit, No Associated Companies
25% × £150,000£37,500
Less: 3/200 × (£250,000 − £150,000)−£1,500
Corporation Tax due£36,000

⚠️ The common mistake: Many calculators simply apply 25% to the whole profit once it exceeds £50,000. That gives £37,500 here - overstating the liability by £1,500. On a £200,000 profit the overstatement reaches £3,750.

What "effective rate" actually means in the band

Marginal relief means the effective rate increases gradually as profit climbs through the band, rather than jumping to 25% at £50,001. At the bottom of the band (£50,001) the effective rate is just over 19%. At the top (£250,000) it reaches exactly 25%.

The marginal rate on each additional pound of profit within the band is 26.5% - meaning if you're in the marginal band, an extra £1,000 of profit costs £265 in CT, not £250. That's worth knowing for dividend planning decisions.

✓ Planning insight: If your projected profit sits just above £50,000, reducing taxable profit through pension contributions or accelerating deductible expenditure can shift you into the 19% band entirely - saving more per pound than at the main rate.

Associated companies - where it gets complicated

The thresholds above assume a company trading on its own. The moment a director controls more than one company - or two or more companies share a significant financial, economic, or organisational link - the rules change.

Under s18AA CTA 2010, the £50,000 lower limit and £250,000 upper limit are divided equally between all associated companies. If two companies are associated, each company's thresholds are halved:

Associated Companies Lower Limit Upper Limit
1 (standalone) £50,000 £250,000
2 £25,000 £125,000
3 £16,667 £83,333
4 £12,500 £62,500

This means a director running two companies, each with £80,000 profit, cannot claim the small profits rate on either. Their £50,000 lower limit is halved to £25,000 - both companies are fully in the marginal band, paying more than a director running one company with £160,000 profit.

Worked Example - Two Associated Companies, £80k Profit Each
Upper limit: £250,000 ÷ 2 = £125,000
25% × £80,000£20,000
Less: 3/200 × (£125,000 − £80,000)−£675
CT per company£19,325
Combined CT (2 companies)£38,650
vs. one company at £160,000 profit£37,000
Additional tax from having two companies£1,650

What counts as an associated company?

HMRC applies a broad definition. Two companies are associated if one controls the other, or both are under common control. Control generally means owning more than 50% of the shares - but HMRC also applies "substantial commercial interdependence" tests covering:

A director's spouse running a separate company can make both companies associated even without shared ownership. HMRC guidance (CTM03570) is explicit that informal arrangements count.

⚠️ Dormant companies count: A dormant associated company still counts toward the threshold division unless it was dormant throughout the entire accounting period. A company that traded for even one day in the period counts.

Short accounting periods

Both the lower and upper limits are time-apportioned for accounting periods shorter than 12 months. A company incorporated mid-year with a six-month first period has effective limits of £25,000 and £125,000. This catches many newly incorporated companies that assume the full thresholds apply.

💡 Rooby tip: Rooby lets you set the number of associated companies per client directly - the CT liability calculation adjusts both the threshold division and the marginal relief formula automatically, so the figure shown is always the correct liability, not an approximation.

The practical implication for accountants

Every client in the £50,000–£250,000 profit range (adjusted for associated companies) needs marginal relief applied. It's not optional and it's not complex - but it does require knowing the client's associated company position, which many practices don't track systematically.

The check is simple: does the director control or have a significant link to any other company? If yes, establish the count, divide the thresholds, and apply the marginal relief formula with the adjusted upper limit. A £200,000 profit with two associated companies - upper limit halved to £125,000 - attracts the full 25% main rate with no marginal relief at all.

Getting this right isn't just accuracy for its own sake. It's the difference between a client provisioning correctly throughout the year and arriving at payment date with a shortfall - or an overprovision that locks up cash unnecessarily.

See how Rooby calculates this automatically

Rooby connects to Xero and applies the marginal relief formula with associated company adjustments for every client - with full workings shown.

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