The 26.5% Corporation Tax Rate Nobody Told You About: How Marginal Relief Really Works for UK Company Owners

Most owners of a UK limited company can tell you the headline Corporation Tax rates: 19% for small companies, 25% for large ones. Far fewer know that between those two figures sits a band where the company effectively pays 26.5% on every extra pound of profit — a rate higher than the "main rate" itself. It is not a mistake and it is not a penalty. It is how marginal relief is designed to work, and it catches out founders who budget for a flat 19% and then watch their tax bill climb faster than their profits.

Here is how the system actually works, why the effective rate in the middle band is 26.5%, and the two common situations that quietly push more of your profit into it.

The Three-Rate System Since April 2023

For accounting periods from 1 April 2023, there is no longer a single Corporation Tax rate. Instead there are three positions, and all of them still apply for the financial years starting 1 April 2025 and 1 April 2026 — nothing changed:

Profits up to £50,000 are taxed at the small profits rate of 19%. Profits above £250,000 are taxed at the main rate of 25%. Profits between £50,000 and £250,000 are taxed at 25%, then reduced by marginal relief, which produces an effective rate that rises gradually from 19% towards 25%.

These figures are set in legislation — the Finance Act 2025 confirms the 25% main rate, the 19% small profits rate, and a marginal relief "standard fraction" of 3/200 for the year — so they are not guidance an accountant can simply interpret away.

The Band Where Every Extra Pound Costs 26.5p

The confusing part is what happens inside the £50,000 to £250,000 band. Because marginal relief is withdrawn as profits rise, each additional pound of profit in that range is effectively taxed at 26.5% — higher than the 25% you would pay above £250,000.

That sounds backwards, but it is deliberate. The band exists to smooth the jump between 19% and 25%. The trade-off is that the marginal rate inside the band overshoots the main rate, so the cost of earning your way through the middle is steeper than most owners expect.

A Worked Example

Take a company with £100,000 of profit, one shareholder-director, no associated companies and no dividend income from other companies.

Tax at the main rate is 25% × £100,000 = £25,000. Marginal relief is (£250,000 − £100,000) × 3/200 = £150,000 × 0.015 = £2,250. Corporation Tax due is therefore £25,000 − £2,250 = £22,750.

That is an effective rate of 22.75% — not 19%, and not 25%. A founder who set aside 19% (£19,000) would be £3,750 short when the bill arrives.

How Marginal Relief Is Calculated

HMRC's formula is: (upper limit − augmented profits) × (taxable total profits ÷ augmented profits) × standard fraction.

For most owner-managed companies, "augmented profits" simply equals taxable profits, because augmented profits only add in certain dividends received from companies you do not control. The upper limit is £250,000 and the standard fraction is 3/200. HMRC provides a free online Marginal Relief calculator, and it is worth running your real numbers through it rather than estimating.

Two Traps That Shrink Your £50,000 Threshold

The £50,000 and £250,000 limits are not fixed for every company. Two situations reduce them.

The first is associated companies. If you control more than one company, the limits are divided between them: the limit divided by the number of associated companies plus one. Own two associated companies and your small-profits ceiling drops from £50,000 to £25,000 each — so profit that would have been taxed at 19% is pulled into the 26.5% band. We cover this in detail in our separate article on the associated companies trap.

The second is short accounting periods. If your accounting period is shorter than 12 months — common in a company's first year — the limits are reduced proportionately. A six-month period halves your thresholds, again pushing more profit toward the higher effective rate.

When the 19% Rate Does Not Apply at All

One category never gets the small profits rate: a "close investment-holding company" — broadly, a close company that does not exist wholly or mainly to trade, or to invest in property let to unconnected parties. These companies pay the 25% main rate on all their profits, no matter how small. If your UK company mainly holds investments rather than trading, do not assume the 19% rate is available.

Why Non-Resident Owners Get the Number Wrong

A UK limited company is UK tax-resident by virtue of being incorporated here, wherever its owner lives. That means a non-resident-owned company pays Corporation Tax under exactly the same three-rate system — and non-resident founders are often the ones budgeting from a single remembered figure. Some set aside 19% because they read that "small companies pay 19%"; others assume a flat 25%. Both can be wrong once profits sit in the middle band, and the gap is real money you will need when the bill is due nine months and one day after your year-end.

The safe approach is to model your expected profit against the actual bands, remember that the middle band bites at 26.5%, and check whether associated companies or a short first period have quietly shrunk your thresholds.

Have Questions About Your Own Situation?

Corporation Tax rate bands, associated companies and marginal relief can get complicated fast — especially across borders. If you would like to talk your own numbers through with the MP Partner experts team, we are happy to help: no pressure, no hard sell, just clear answers.

Book a free consultation with our experts →