Corporation Tax: when the next pound costs 26.5 per cent

The two Corporation Tax rates everyone quotes are 19 per cent and 25 per cent. A company with profits between £50,000 and £250,000 pays neither on its next pound of profit. It pays 26.5 per cent, more than the main rate charged to the largest companies in the country.

Nobody has made a mistake. Marginal relief is built that way, and it matters most to the growing owner-managed company.

How the band works

For the year starting 1 April 2026, a company with profits of £50,000 or less pays the small profits rate of 19 per cent. Above £250,000 it pays the main rate of 25 per cent.

In between, the company pays the main rate on all its profit, then takes off marginal relief. For a company with no dividend income from other companies, the relief is 3/200 of the gap between £250,000 and its profits. It shrinks as profits rise and disappears at £250,000.

HMRC's own manual sets out what that means. Tax on £250,000 at 25 per cent is £62,500. Tax on £50,000 at 19 per cent is £9,500. So the £200,000 in between carries £53,000 of tax, which is 26.5 per cent.

What it looks like in pounds

Illustration, not a real client. A design studio in Shoreditch has taxable profits of £100,000 for a 12-month accounting period and no associated companies.

• Tax at the main rate: £100,000 at 25 per cent is £25,000.

• Marginal relief: 3/200 of £150,000 is £2,250.

• Corporation Tax due: £22,750.

That is 22.75 per cent of the whole profit. But had the profit been £101,000, the bill would be £23,015. The extra £1,000 of profit cost £265 in tax.

The average rate is the one a tax computation shows. The marginal rate is the one that should drive decisions about the next pound. The workings are set out step by step in how marginal relief is calculated.

The second company that halves your limits

This is the part that catches people out. The £50,000 and £250,000 limits are divided by the number of associated companies, plus your own. Broadly, companies are associated if one controls the other, or both are controlled by the same person or people.

So if you own a trading company and set up a second one, perhaps for a new venture or to hold a let flat, each company's limits fall to £25,000 and £125,000.

Illustration, not a real client. A trading company makes £50,000 of profit. On its own it pays 19 per cent, £9,500. Once its owner sets up a second, active company, the same £50,000 sits inside the reduced band and the bill becomes £11,375: £1,875 more, with nothing changed in the trading company itself.

One detail softens this. An associated company that has carried on no trade or business at any time in the accounting period is ignored. Against that, a company counts even if it was associated for only part of the period, and a relative's company can count where the two businesses are substantially interdependent. Check rather than assume.

Short accounting periods

The limits also shrink when an accounting period is shorter than 12 months, for example a company's first period or a change of year end. A six-month period has limits of roughly £25,000 and £125,000, worked out by days, so a busy first half-year can land in the band sooner than expected.

My view, and what to do with it

The main rate went from 19 per cent, the single rate until 31 March 2023, to 25 per cent. For a company in the band, that was a real hit. A growing small company now pays a higher rate on its next pound of profit than a company with millions in profit pays on any of it.

The sensible responses are unglamorous:

1. Know which band you are in before your year end, not when the accounts are drawn up.

2. If you were already going to spend money the business needs, timing can matter. A deduction in the band saves 26.5p in the pound, against 19p below it. Never buy something just to save tax.

3. Before setting up a second company, price the effect on both companies' limits, not just the reason for the new one.

4. Keep a dormant company genuinely dormant if you want it ignored.

The Corporation Tax rates and deadlines for 2026/27 are the place to start a year-end check. For a company in the band, 26.5 is the number that prices the next pound of profit.

About the author

Harvey Dhillon is the founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and worked in finance roles in investment banking, wealth management and private equity, starting at Barclays, before leaving in 2020 to build the firm. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by T (@tanyabarrow) on Unsplash.