Corporation tax has been more complicated since April 2023. Before that, a flat rate of 19% applied to almost all UK limited companies — simple to understand, easy to plan around. The current system has two rates, a tapering band between them that is more expensive per pound than either headline rate, and a rule around associated companies that reduces the thresholds significantly for directors who own more than one company. None of this is widely understood, and it leads to some avoidable surprises at year-end.
This post explains how the current system works, where the traps are, and what you can do to manage your corporation tax position effectively.
The two rates
For accounting periods ending on or after 1 April 2023, corporation tax operates on a dual-rate basis:
| Profits | Rate | Name |
|---|---|---|
| Up to £50,000 | 19% | Small profits rate |
| £50,001 – £250,000 | Tapered (effective ~26.5% on the marginal slice) | Marginal relief band |
| Over £250,000 | 25% | Main rate |
Around 70% of active UK limited companies have profits below the £50,000 threshold, meaning most small director-only companies pay the small profits rate of 19% and are unaffected by marginal relief. If your company's taxable profits are comfortably below £50,000, the calculation remains straightforward. The complexity arises as profits grow toward and beyond that lower threshold.
Marginal relief — and the 26.5% trap
Marginal relief is designed to avoid a cliff edge where crossing £50,000 in profits suddenly pushes the entire liability to 25%. Instead, it tapers the effective rate gradually from 19% toward 25% across the £50,000 to £250,000 band.
The counterintuitive result is that profits within the marginal relief band attract an effective marginal rate of approximately 26.5% — higher than the 25% main rate that applies above £250,000. This arises because as profits increase, the marginal relief credit is progressively withdrawn, and the combined effect of the main rate tax and the withdrawal produces 26.5% on each additional pound in the band.
Worked example: A company has taxable profits of £150,000 with no associated companies. It falls in the marginal relief band. The effective corporation tax rate is approximately 22% — significantly more than the 19% small profits rate, but less than 25%. The marginal rate on profits above £50,000 within the band is 26.5%. A company at exactly £250,000 pays exactly 25% on all profits; a company at £200,000 is paying a blended rate of around 23.5%.
The formula uses a fraction of 3/200, applied to the gap between the upper limit and actual profits. In practice, your CT600 software calculates this automatically — you do not need to work it out by hand. What matters is being aware that profits in the £50,000 to £250,000 range carry a higher marginal cost than profits above £250,000, which has implications for profit extraction and planning.
The associated companies rule
The most commonly overlooked element of the current system is the associated companies rule. If your company has associated companies, the £50,000 and £250,000 thresholds are divided equally between them.
Two companies are associated if one controls the other, or both are under common control — broadly, if the same person or persons own or control both. For most directors, this means any other limited company they own or have a significant interest in counts as an associated company.
Example: You own two limited companies. Your thresholds are halved: the small profits rate applies up to £25,000 (not £50,000), and the main rate kicks in above £125,000 (not £250,000). A second company therefore pushes you into the marginal relief band at a much lower profit level than you might expect — with the 26.5% marginal rate applying from £25,001 upward.
The rule extends further: dormant companies, holding companies, and companies in which you own shares as a minority but have significant influence can all count. If you are thinking about incorporating a second company — for a side business, a property, or a holding structure — understanding the impact on both entities' thresholds is important before you proceed.
What counts as taxable profit
Corporation tax is charged on taxable profits, which is not the same as your accounting profit. The key adjustments:
- Director's salary — deductible as a trading expense, reducing taxable profit
- Employer pension contributions — deductible, subject to HMRC's wholly and exclusively test
- Capital allowances — tax relief on qualifying asset purchases, which may differ from accounting depreciation. The Annual Investment Allowance (AIA) allows 100% relief on up to £1 million of qualifying expenditure per year
- Dividends paid — not deductible. Dividends are paid from post-tax profit, not before tax
- Disallowable expenses — items HMRC does not allow as deductions (entertaining clients, fines, non-business expenditure)
Managing these items — particularly the balance between salary and pension contributions — is one of the primary ways directors can legitimately influence their company's taxable profit and therefore its effective corporation tax rate.
When corporation tax is due
For most small companies, corporation tax is due 9 months and 1 day after the end of the accounting period. So for a company with a 31 March year-end, the payment deadline is 1 January. For a 31 December year-end, it is 1 October the following year.
Large companies — broadly, those with profits over £1.5 million — pay quarterly instalment payments throughout the year rather than a single payment after year-end. This affects very few micro-entity or small director-only companies but is worth knowing if your company is growing.
| Item | Detail |
|---|---|
| Small profits rate | 19% on profits up to £50,000 |
| Main rate | 25% on profits above £250,000 |
| Effective marginal rate in band | ~26.5% on profits between £50,000 and £250,000 |
| Associated companies — threshold split | Divide both thresholds by the number of associated companies plus one |
| Short accounting period | Thresholds pro-rated to the number of days in the period |
| Payment deadline (small companies) | 9 months and 1 day after accounting period end |
| CT600 filing deadline | 12 months after accounting period end |
| Annual Investment Allowance | 100% relief on up to £1m of qualifying capital expenditure |
A note on newly incorporated companies
If your company's first accounting period is shorter than 12 months — which is common when incorporating partway through a calendar year — the £50,000 and £250,000 thresholds are pro-rated to the length of that period. A company incorporated on 1 October with a 31 March year-end has a first period of 182 days, so the thresholds are approximately £24,932 and £124,658 respectively. This catches a number of newly incorporated companies off guard, particularly where the company is profitable from day one and the director assumes the full £50,000 threshold applies.
Need help with your company's corporation tax return?
We prepare CT600 returns and year-end accounts for small limited companies across the UK — fixed fees, no surprises.
Get in TouchThis article is for general information purposes and does not constitute tax advice. Corporation tax rules and rates can change. Always speak to a qualified accountant before making decisions about profit extraction, company structure, or tax planning.