Marginal Relief
/ˈmɑːdʒɪnəl rɪˈliːf/
Marginal relief is a UK corporation tax mechanism that gradually increases the effective tax rate for companies with profits between the small profits rate and the main rate thresholds.
Marginal relief is a UK corporation tax mechanism that gradually increases the effective tax rate for companies with profits between the small profits rate and the main rate thresholds.
Marginal relief is a UK corporation tax mechanism designed to smooth the transition between the small profits rate and the main rate of tax. Rather than imposing a sudden jump from 19% to 25% when a company's profits exceed the lower threshold, marginal relief gradually increases the effective tax rate for companies with profits falling between the two limits. This prevents a situation where earning one extra pound of profit could trigger a significantly higher tax bill on all profits.
Since April 2023, UK corporation tax operates with two rates: the small profits rate of 19% for companies with profits of £50,000 or less, and the main rate of 25% for companies with profits above £250,000. Companies with profits between these two thresholds are in the marginal relief band, where a special formula reduces the main rate charge to produce an effective rate somewhere between 19% and 25%.
For Irish founders who have set up a UK subsidiary or a UK-registered company, understanding marginal relief is important for accurate tax planning. It directly affects how much corporation tax your UK entity will pay and influences decisions around profit extraction, dividend timing, and intercompany arrangements. Whilst the concept does not exist in Irish tax law, where a flat 12.5% trading rate applies, it is a key consideration for any cross-border structure involving the UK.
The marginal relief calculation uses a specific formula set out by HMRC. The relief is calculated as a fraction (currently 3/200) multiplied by the difference between the upper limit (£250,000) and the company's taxable profits, then adjusted for the ratio of taxable profits to total profits. The result is deducted from the corporation tax that would otherwise be due at the main 25% rate.
In practical terms, this means a company with profits of £100,000 would not pay the full 25% rate. Instead, the marginal relief formula reduces the tax charge, producing an effective rate of approximately 26.5% on the marginal pound but an overall blended rate lower than 25%. As profits increase towards £250,000, the effective rate gradually converges with the main rate. Your accountant will apply this formula when preparing the company's corporation tax return.
It is worth noting that the upper and lower limits must be divided equally among associated companies. If you control multiple UK companies, each company's share of the thresholds is reduced, which can push entities into higher effective tax rates sooner. This is an important consideration for founders with multiple UK entities or group structures.
Marginal relief is available to any UK company with augmented profits between £50,000 and £250,000 in an accounting period. Augmented profits include not only taxable trading profits but also exempt distributions received from non-associated companies. This broader measure ensures that the thresholds reflect the company's true economic position.
Companies with profits at or below £50,000 automatically qualify for the small profits rate of 19% and do not need to calculate marginal relief. Companies with profits at or above £250,000 pay the full 25% main rate. Only those in between need to apply the formula, though most accounting software handles this automatically.
The upper and lower profit thresholds for marginal relief must be divided by the number of associated companies plus one. Two companies are associated if one controls the other, or both are under common control. For founders with multiple UK entities or a group structure, this can significantly reduce the thresholds available to each company.
For example, if a founder controls two UK companies, the lower threshold drops from £50,000 to £25,000 per company, and the upper threshold drops from £250,000 to £125,000. This means each company enters the marginal relief band at a lower profit level and reaches the main 25% rate sooner. Planning your corporate structure carefully can help maximise the benefit of marginal relief across the group.
Irish founders with UK subsidiaries should factor marginal relief into their transfer pricing and profit allocation strategies. Because Ireland's corporation tax rate on trading income is 12.5%, there may be opportunities to structure intercompany transactions so that profits are recognised in the most tax-efficient jurisdiction, subject to transfer pricing rules and substance requirements in both countries.
The interaction between UK marginal relief and Ireland's tax compliance obligations also needs attention. If your UK company pays dividends to an Irish parent, the financial statements of both entities must correctly reflect the tax position. Double taxation relief may be available to offset UK tax paid against Irish tax on the same income, but claiming this requires proper documentation and timely filing.
If your UK company has an accounting period shorter than 12 months, the upper and lower thresholds are proportionally reduced. For example, a six-month accounting period would halve the thresholds to £25,000 and £125,000 respectively. This is relevant for newly incorporated companies or those changing their financial year end.
Careful timing of your accounting period can therefore influence whether your company falls within the marginal relief band. Discussing this with your accountant before setting or changing your financial year end can help optimise your tax position and avoid unexpected liabilities.
Marginal relief is claimed automatically through your UK corporation tax return (CT600). Your accountant or tax software will apply the formula when computing the tax liability. There is no separate application process, but you must ensure that the return accurately reflects your taxable profits, augmented profits, and the number of associated companies for the period.
Errors in the calculation, particularly around associated companies or short accounting periods, can lead to incorrect tax payments and potential penalties. If your company benefits from loss relief or other deductions that reduce taxable profits into the marginal band, the relief must be recalculated accordingly. Keeping your records accurate and working with a qualified adviser ensures you claim the correct amount and maintain full compliance with HMRC requirements.
