Marginal Relief & Corporation Tax in 2025
How does marginal relief work for reducing my corporation tax liability?
Corporation tax is a key concern for businesses, and if your company’s profits fall within a certain range, you might qualify for Marginal Relief. This mechanism is designed to ease the transition between the lower and main rates of corporation tax, effectively reducing your liability. Here’s a clear breakdown of how Marginal Relief works and how it can benefit your business in 2025.
Corporation Tax in 2025: The Basics
Corporation tax is charged on your company’s profits. From April 2023, a two-tiered system was introduced:
Small Profits Rate (SPR): 19% for companies with profits up to £50,000.
Main Rate: 25% for companies with profits over £250,000.
If your company’s profits fall between these thresholds (£50,001 and £250,000), Marginal Relief applies to reduce your effective tax rate.
How Marginal Relief Works
Marginal Relief provides a gradual increase in the tax rate as profits grow, preventing a sharp jump from the SPR to the Main Rate. The calculation is based on the following formula:
Marginal Relief = (Upper Limit - Profits) x Marginal Relief Fraction
Upper Limit: £250,000 (adjusted for associated companies and accounting periods shorter than 12 months).
Marginal Relief Fraction: 3/200 for the 2025 tax year.
By applying this formula, Marginal Relief reduces the corporation tax payable on profits above £50,000 but below £250,000.
Example Calculation
Let’s say your company’s profits for the year are £120,000, with no associated companies:
Calculate tax at the Main Rate:
£120,000 x 25% = £30,000
Calculate Marginal Relief:
(£250,000 - £120,000) x (3/200) = £1,950
Reduce tax liability:
£30,000 - £1,950 = £28,050
In this scenario, Marginal Relief saves your business £1,950 in corporation tax.
Key Considerations
Associated Companies: If your business is part of a group, the thresholds for Marginal Relief (£50,000 and £250,000) are divided among all associated companies.
Short Accounting Periods: Thresholds are adjusted proportionally for accounting periods shorter than 12 months.
Profit Adjustments: Ensure that all allowable deductions and reliefs are applied before calculating Marginal Relief.
How to Maximise the Benefit
To make the most of Marginal Relief:
Review Group Structures: Consolidating or restructuring associated companies can optimize your thresholds.
Seek Professional Advice: Tax advisors can help you navigate complex calculations and ensure compliance.
Plan Ahead: Accurate forecasting of profits helps in estimating tax liabilities and potential relief.
Final Thoughts
Marginal Relief is a valuable tool for reducing corporation tax liability, especially for companies with mid-range profits. By understanding how it works and applying it correctly, your business can achieve significant savings while maintaining compliance with HMRC regulations.
If you’re unsure about your eligibility for Marginal Relief or need tailored advice, feel free to reach out. We’re here to help you optimise your tax position and support your business’s success.