The Two-Rate System
Since April 2023, UK corporation tax has operated on a two-rate system based on the level of taxable profits. This continues unchanged into 2025/26:
| Rate | Threshold | Tax rate |
|---|---|---|
| Small profits rate | Profits up to £50,000 | 19% |
| Main rate | Profits over £250,000 | 25% |
| Marginal relief | £50,001 – £250,000 | Effective 26.5% |
Companies with profits up to £50,000 pay the same 19% rate that applied to all companies before April 2023. Companies with profits above £250,000 pay 25%. The tricky part is the marginal relief band in between.
How Marginal Relief Works
If your company’s profits fall between £50,000 and £250,000, you don’t simply pay 25% on everything. Instead, you calculate tax at the main rate (25%) and then subtract a marginal relief deduction.
The formula
Marginal relief = (Upper limit − Profits) × Profits/Profits × 3/200
In practice, the fraction simplifies to:
Marginal relief = (£250,000 − Profits) × 3/200
This produces an effective marginal rate of 26.5% on profits between £50,000 and £250,000. Yes, that’s higher than the main rate — each additional pound of profit in this band costs 26.5p in tax, not 25p. This is because each pound above £50,000 gradually removes the small profits rate benefit on the first £50,000.
Corporation Tax at Different Profit Levels
| Taxable profits | Tax calculation | Tax payable | Effective rate |
|---|---|---|---|
| £30,000 | £30,000 × 19% | £5,700 | 19.0% |
| £50,000 | £50,000 × 19% | £9,500 | 19.0% |
| £80,000 | £80,000 × 25% − £2,550 relief | £17,450 | 21.8% |
| £120,000 | £120,000 × 25% − £1,950 relief | £28,050 | 23.4% |
| £150,000 | £150,000 × 25% − £1,500 relief | £36,000 | 24.0% |
| £250,000 | £250,000 × 25% | £62,500 | 25.0% |
| £500,000 | £500,000 × 25% | £125,000 | 25.0% |
Worked Example
Greenfield Design Ltd has taxable profits of £120,000 for the year ending 31 March 2026.
Step 1 — Calculate tax at the main rate: £120,000 × 25% = £30,000
Step 2 — Calculate marginal relief: (£250,000 − £120,000) × 3/200 = £130,000 × 0.015 = £1,950
Step 3 — Corporation tax payable: £30,000 − £1,950 = £28,050
Effective rate: £28,050 ÷ £120,000 = 23.4%
Without marginal relief, the company would pay £30,000. The relief saves £1,950.
Associated Companies
If your company has associated companies (broadly, companies under common control), the upper and lower limits are divided equally between them. This means:
| Number of associated companies | Lower limit (each) | Upper limit (each) |
|---|---|---|
| 1 (standalone) | £50,000 | £250,000 |
| 2 | £25,000 | £125,000 |
| 3 | £16,667 | £83,333 |
| 4 | £12,500 | £62,500 |
Example: If you have two associated companies, the small profits rate only applies up to £25,000 each, and the main rate kicks in above £125,000 each. This prevents business owners from splitting profits across multiple companies to stay below the thresholds.
What counts as “associated”
Two companies are associated if one controls the other, or both are under the control of the same person or group. Control generally means holding more than 50% of the share capital, voting power, or rights to income/assets.
Dormant companies (no trade, no income, no assets) are excluded from the count.
Should You Incorporate?
If you’re currently a sole trader, the corporation tax rates are only part of the picture. You also need to consider:
- Extracting profits: You’ll pay income tax and NI on salary, and dividend tax on dividends — the combined burden can exceed the sole trader rate
- Administrative costs: Company accounts, Corporation Tax return, annual confirmation statement
- National Insurance: Director’s salary can be structured to minimise NI, but employer NI (15% above £5,000) applies
As a rough guide, incorporation starts to make sense when profits consistently exceed £50,000–£60,000, but the optimal structure depends on how much you need to draw from the business. For a detailed comparison, see our sole trader vs limited company guide.
Key Takeaway
The corporation tax system rewards smaller companies: if your profits are under £50,000, you pay just 19%. Above £250,000, it’s a flat 25%. The marginal relief band between £50,000 and £250,000 creates an effective rate of 26.5% on each additional pound — worth understanding when planning investments, pension contributions, or the timing of expenses.
Use the corporation tax calculator to see exactly how much tax your company will pay at different profit levels.