Marginal Relief is a tax relief scheme that helps companies reduce their Corporation Tax bill if their profits fall between certain thresholds. Since 1st April 2023, the UK Corporation tax System has introduced a gradual increase in tax rates for businesses with profits between £50,000 and £250,000.
This ensures a smoother transition from the Small Profits Rate to the Main Rate, preventing a sudden jump in tax payments. Without Marginal Relief, businesses could see a sharp increase in their tax liability as profits rise above £50,000.
How the Corporation Tax Rates Work
Under the new system:
- Companies with profits up to £50,000 pay a small profits rate of 19%
- Companies with profits over £250,000 pay the main rate of 25%
- Companies with profits between £50,000 and £250,000 can apply for Marginal Relief, reducing their tax rate gradually
This means businesses making more than £50,000 but less than £250,000 do not immediately face the full 25% tax rate. Instead, Marginal Relief ensures that the increase in tax is phased in.
Who Can Claim Marginal Relief?
A company can claim Marginal Relief if its taxable profits fall between £50,000 and £250,000. However, there are some conditions:
- If the accounting period is shorter than 12 months, the profit thresholds reduce proportionally
- If the company has associated companies (businesses controlled by the same entity), the profit limits divide by the total number of associated companies
For example: If a business has 3 associated companies, the lower profit limit becomes £12,500 and the upper profit limit becomes £62,500.
Read more: Marginal Relief Across Multiple Businesses
Who Cannot Claim Marginal Relief?
Not all companies qualify for Marginal Relief. Businesses that cannot claim include:
- Non-UK resident companies, as they are not subject to the same Corporation Tax regulations
- Close investment holding companies (companies that mainly make investments rather than trade), since these companies typically do not generate trading profits
- Companies whose profits exceed £250,000 (including distributions from unrelated companies), as they automatically fall under the main rate of 25%
Incorrect assumptions can lead to miscalculations and unexpected tax liabilities.
How to Calculate Marginal Relief
Calculating Marginal Relief follows a structured formula:
(Upper Limit – Profits) x Basic Profits / Profits x MSCR Fraction
Where:
- Upper Limit is £250,000
- Basic Profits are the company’s trading profits and gains
- Profits include Basic Profits plus Franked Investment Income (dividends from other companies)
- MSCR Fraction is 3/200
Alternatively, businesses can use the following simplified tax bands:
- £50,000 or less = 19% tax
- £50,000 to £249,999 = an effective marginal rate of 26.5% applies due to Marginal Relief
- £250,000 or more = 25% tax
These bands allow businesses to estimate their Corporation Tax quickly without applying the full formula. However, for precise calculations, businesses should seek professional tax advice or use HMRC’s online calculator.
Using HMRC’s Online Calculator
To simplify tax calculations, HMRC has introduced an Online Marginal Relief Calculator. Businesses can use this tool to determine the exact amount of tax relief available. Before using it, businesses should gather details such as:
- Accounting period start and end dates
- Total taxable profits
- Distributions from non-associated companies
- Number of associated companies
The calculator helps businesses avoid costly errors and ensures they pay the correct amount of tax. It is particularly useful for companies with fluctuating profits, as it allows them to estimate their future tax liabilities more accurately.
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The information provided in this article is intended for general guidance and informational purposes only. While we strive to ensure accuracy and keep content up to date, tax laws and regulations may change.