Since April 2023, the UK has operated a two-tier corporation tax system, and by 2026 most owner-managed businesses are feeling the effects. The headline 25% main rate applies to profits above £250,000, the 19% small profits rate applies up to £50,000, and everything in between is taxed using marginal relief — producing an effective rate of around 26.5% on each pound of profit in that band.
For UK SMEs, the question "how much corporation tax will I pay on £100k of profit?" no longer has a single, simple answer. It depends on associated companies, augmented profits, accounting period length, and timing decisions that the founder still controls.
How marginal relief actually works
The marginal relief formula reduces the headline 25% liability by a fraction (currently 3/200) of the difference between the upper limit (£250,000) and your augmented profits. The practical effect is that every additional pound earned between £50,000 and £250,000 is taxed at roughly 26.5% — higher than the main rate. This is counter-intuitive, but it is exactly how Parliament intended the relief to taper.
So a company with £100,000 of profit pays around £22,750 of corporation tax — an effective rate of 22.75%. A company with £200,000 of profit pays around £49,250, an effective rate of 24.6%. The closer you get to £250,000, the closer your effective rate gets to 25%.
The associated companies trap
The £50,000 and £250,000 thresholds are divided by the number of associated companies. If you control two companies, each gets a £25,000 small profits limit and a £125,000 upper limit. Many directors with property SPVs, dormant entities, or family companies are unknowingly pushing themselves into a higher marginal band.
Reviewing associated-company status is one of the highest-impact corporation tax exercises we run for clients. We have seen six-figure groups recover thousands simply by dissolving unused subsidiaries or restructuring shareholdings. Our annual accounts team flags this risk during every year-end review.
Planning levers that still work
Marginal relief makes timing more valuable than ever. If you can keep profits at or below £50,000 in any given period, you avoid the 26.5% band entirely. Consider:
- Accelerating allowable expenditure — bringing forward planned repairs, software subscriptions, or training costs into a period where they shift you into the lower band.
- Pension contributions — employer pension contributions are deductible and uncapped (subject to the wholly-and-exclusively test). For a director-shareholder, pushing £30,000 into a SIPP can move taxable profit out of the 26.5% band.
- Capital allowances — Full Expensing and the Annual Investment Allowance remain powerful timing tools.
- R&D claims — if you carry out qualifying activity, the merged scheme provides above-the-line credits that reduce your effective rate.
- Salary vs dividend mix — increasing director's salary (subject to NIC trade-offs) reduces taxable profit.
Watch the augmented profits figure
Marginal relief is calculated on augmented profits — taxable profits plus exempt dividends from non-group companies. A founder who takes investment dividends through their trading company can find themselves accidentally above the threshold. Splitting investment activity into a separate holding company is sometimes a better answer.
What this means for forecasting
Quarterly management accounts must now show a forecast effective tax rate, not just a 19% or 25% headline figure. Lenders, investors, and acquirers all expect to see this level of analysis. Our business advisory team builds this into rolling forecasts as standard.
How PushDigits helps
Every January and February, we run corporation tax planning reviews for owner-managed businesses to confirm where they sit in the marginal band, whether associated companies are dragging them up, and where pension, capital allowance, or R&D claims can pull them back down. The work usually pays for itself many times over.
If your year-end is approaching and your profit is anywhere between £40,000 and £300,000, you almost certainly have room to optimise. Book a corporation tax planning call with a Chartered Accountant and we will walk you through the numbers before HMRC's deadline closes the window.