Corporation Tax Marginal Relief Explained: Formulas & Examples for 2026/27

When the UK government reintroduced the tiered Corporation Tax system, it created a massive tax gap between small companies paying 19% and large companies paying 25%. To prevent a company earning £50,001 from facing a sudden, massive tax increase on its entire profit, HMRC uses a mechanism called **Marginal Relief**. In the 2026/27 tax year, Marginal Relief acts as a sliding scale for companies with taxable profits between £50,000 and £250,000. In this guide, we explain the mathematical formula behind this relief, walk through step-by-step examples, and outline the 26.5% marginal tax rate trap.

1. The Marginal Relief Formula

To calculate Marginal Relief, HMRC uses a standard fraction. For the 2026/27 tax year, the Marginal Relief fraction is **3/200** (or 0.015 in decimal form). The tax is calculated by first applying the Main Rate (25%) to all profits, and then subtracting the Marginal Relief amount using this formula:

Marginal Relief = (Upper Limit − Taxable Profits) × Marginal Relief Fraction

Which translates to:
Marginal Relief = ( £250,000 − Taxable Profits ) × ( 3 / 200 )

If you want to run these calculations instantly for your business, use our free Corporation Tax Calculator.

2. Calculation Example: Profits of £100,000

Let’s calculate the exact Corporation Tax due for a company with net taxable profits of £100,000:

Step 1: Calculate Main Tax (25%)

• Main Tax Due: £100,000 × 25% = £25,000.00

Step 2: Calculate Marginal Relief

• Upper Limit: £250,000.00
• Relief: (£250,000 − £100,000) × (3/200) = £150,000 × 0.015 = £2,250.00

Step 3: Subtract Relief from Main Tax

• Net Tax Due: £25,000.00 − £2,250.00 = £22,750.00

Step 4: Verify the Effective Tax Rate

• Effective Tax Rate: £22,750.00 ÷ £100,000 = 22.75%

This shows how the effective tax rate sits between the 19% small profits rate and the 25% main rate.

3. The 26.5% Marginal Tax Rate Trap

Because of the way the formula works, every pound of profit your company earns in the marginal band (between £50,000 and £250,000) is effectively taxed at a **marginal rate of 26.5%**.

The Math: If your company’s profit increases from £100,000 to £100,100, your tax increases from £22,750.00 to £22,776.50. You paid £26.50 in tax on that extra £100.00 of profit, which represents a tax rate of **26.5%**!

Because of this high marginal rate, tax planning inside this band is critical. Consider using employer pension contributions or capital allowances to reduce your profits below the £50,000 threshold. Check out our Optimal Director Split Calculator to see how drawing a salary impacts your corporate tax liability.

4. Frequently Asked Questions

What is Marginal Relief in UK Corporation Tax?

Marginal Relief is a tax deduction that reduces the Corporation Tax bill for companies with taxable profits between £50,000 and £250,000, ensuring a smooth transition between the 19% and 25% rates.

What is the Marginal Relief fraction for 2026/27?

The standard Marginal Relief fraction is 3/200 (or 0.015 decimal equivalent) for a company with no associated businesses.

Why is the marginal tax rate 26.5%?

The 26.5% rate is the mathematical result of applying the 25% main rate tax and subtracting the 1.5% reduction in relief on each additional pound of profit. Any profit between £50,000 and £250,000 is taxed at this higher rate.

Do associated companies affect my Marginal Relief calculation?

Yes. If you have associated companies, both the lower limit (£50,000) and upper limit (£250,000) are divided by the number of associated companies, which reduces your relief space.

Can a company with losses claim Marginal Relief?

Marginal Relief only applies to profitable companies whose net taxable profits fall between the lower and upper limits. If the company makes a loss, no tax is due, so no relief can be claimed.

How do I claim Marginal Relief?

You claim it automatically when preparing your Company Tax Return (Form CT600). Your tax software or accountant will calculate the relief based on your declared profits and enter the deduction in the tax computation section.

Does Marginal Relief apply to ring-fenced profits?

No. Ring-fenced profits (such as profits from oil rights in the UK or the UK continental shelf) are subject to different tax rates and separate relief frameworks.

What happens if my accounting period is less than 12 months?

If your accounting period is shorter than 12 months, both the £50,000 and £250,000 limits are scaled down proportionally. For example, for a 6-month accounting period, the limits become £25,000 and £125,000.

Statutory & Legislative References

• Corporation Tax Act 2010 – Sections 19-21: Outlines the statutory rules and limits for Marginal Relief.
• Finance Act 2021: Legislation that reintroduced the dual-rate system and the Marginal Relief fraction.
• HMRC Company Taxation Manual (CTM): Official manuals detailing calculations and associated company impacts on relief limits.