Corporation Tax is 19% on small profits and 25% on large ones. In between, the rules say each extra pound of profit is effectively taxed at 26.5%, more than either. That sounds wrong, and it is one of the most common questions directors ask us. The good news: nobody actually pays 26.5% on their profit. Here is what is really going on, with the sums.
The three bands
- Profits up to £50,000: the small profits rate of 19%.
- Profits of £250,000 or more: the main rate of 25%.
- Profits in between: the 25% main rate, reduced by marginal relief. HMRC's formula for the relief is 3/200 × (£250,000 − your profits).
Why a 26.5% rate appears
Think of the 19% rate as a discount for small companies. At £50,000 of profit, the discount is worth the whole difference between the two rates: £50,000 × (25% − 19%) = £3,000. Marginal relief then takes that discount away gradually as profits grow, until it has gone completely at £250,000.
The £3,000 discount is withdrawn evenly across the £200,000 between the limits:
- Discount withdrawn for each extra pound of profit: £3,000 ÷ £200,000 = 1.5p.
- Tax on each extra pound in the middle band: the 25% main rate plus the 1.5% being withdrawn, 25% + 1.5% = 26.5%.
What you actually pay
The 26.5% only applies to each extra pound. The rate on your whole profit, the overall rate, never goes above 25%:
| Profit | Corporation Tax | Working | Overall rate |
|---|---|---|---|
| £40,000 | £7,600.00 | £40,000 × 19% | 19% |
| £50,000 | £9,500.00 | £50,000 × 19% | 19% |
| £75,000 | £16,125.00 | £18,750 − 3/200 × £175,000 (£2,625) | £16,125 ÷ £75,000 = 21.5% |
| £100,000 | £22,750.00 | £25,000 − 3/200 × £150,000 (£2,250) | £22,750 ÷ £100,000 = 22.75% |
| £150,000 | £36,000.00 | £37,500 − 3/200 × £100,000 (£1,500) | £36,000 ÷ £150,000 = 24% |
| £200,000 | £49,250.00 | £50,000 − 3/200 × £50,000 (£750) | £49,250 ÷ £200,000 = 24.625% |
| £250,000 | £62,500.00 | £250,000 × 25% | 25% |
| £300,000 | £75,000.00 | £300,000 × 25% | 25% |
From £50,000 to £100,000 of profit:
- The tax rises from £9,500.00 to £22,750.00: £22,750 − £9,500 = £13,250 more tax.
- On £100,000 − £50,000 = £50,000 more profit, that is £13,250 ÷ £50,000 = 26.5% on the extra.
- But the overall rate at £100,000 is only £22,750 ÷ £100,000 = 22.75%.
A quicker way to work it out
For a single company with a 12-month period, there is an easier method that gives the same answer: 19% on the first £50,000, plus 26.5% on everything above it. For £100,000 of profit:
- The first £50,000: £50,000 × 19% = £9,500.
- The rest: (£100,000 − £50,000) × 26.5% = £50,000 × 26.5% = £13,250.
- Total: £9,500 + £13,250 = £22,750, exactly what HMRC's formula gives.
Why it matters: the 26.5% band is where planning pays most
Because each extra pound of profit in the middle band costs 26.5p in tax, anything that reduces profit in that band saves 26.5p in every pound, more than at any other level of profit. A £10,000 company pension contribution, for example, saves:
- £10,000 × 19% = £1,900 for a company with profits under £50,000,
- £10,000 × 26.5% = £2,650 for a company with profits between £50,000 and £250,000,
- £10,000 × 25% = £2,500 for a company with profits over £250,000.
The same applies to equipment purchases, salaries and other allowable costs. Timing them into a year where profits sit in the middle band gets the most relief. Our pension guide explains how company pension contributions work.
More than one company, or a short year
The £50,000 and £250,000 limits are shared between associated companies: companies under common control, such as two companies owned by the same director. With one associated company, each company's limits are halved to £50,000 ÷ 2 = £25,000 and £250,000 ÷ 2 = £125,000, so marginal relief starts much sooner. For £100,000 of profit, using the halved upper limit of £125,000:
- Tax at the main rate: £100,000 × 25% = £25,000.
- Marginal relief: (£125,000 − £100,000) × 3/200 = £25,000 × 3/200 = £375. The 3/200 is HMRC's marginal relief fraction, the same as 1.5%.
- Tax to pay: £25,000 − £375 = £24,625, compared with £22,750 for a company on its own.
The limits are also reduced in proportion for an accounting period shorter than 12 months, such as a company's first period or after changing its year end.
Work out your own
Our Corporation Tax calculator works out your bill with HMRC's formula, including associated companies and shorter periods, and shows every step of the working and your payment date.
Common questions
Is Corporation Tax 26.5%?
Not on your whole profit. 26.5% is the rate on each extra pound of profit between £50,000 and £250,000. The overall rate on all your profit rises gradually from 19% to 25%: on £100,000 of profit it is £22,750 ÷ £100,000 = 22.75%.
What is marginal relief?
A reduction in Corporation Tax for companies with profits between £50,000 and £250,000. Tax is worked out at 25%, then reduced by 3/200 × (£250,000 − profits), so the overall rate rises smoothly from 19% to 25%.
How much Corporation Tax is due on £100,000 of profit?
£22,750.00 for a single company with a 12-month period: £100,000 × 25% = £25,000, less marginal relief of (£250,000 − £100,000) × 3/200 = £150,000 × 3/200 = £2,250, so £25,000 − £2,250 = £22,750.00.
Why does marginal relief make planning more valuable?
Because each extra pound of profit between £50,000 and £250,000 costs 26.5p in tax, reducing profit in that band saves 26.5p in every pound. A £10,000 pension contribution saves £10,000 × 26.5% = £2,650 there, compared with £1,900 at 19%.
Do associated companies affect marginal relief?
Yes. The £50,000 and £250,000 limits are shared between associated companies. With one associated company, each company's limits are halved to £25,000 and £125,000, so higher rates start sooner.
Sources: HMRC guidance on GOV.UK: Corporation Tax rates and reliefs and HMRC's Company Taxation Manual on marginal relief (CTM03955 and CTM03956). Figures correct for the financial year from 1 April 2026. General guidance, not personal advice.