How to use it
- Enter the taxable profit for the accounting period, after allowable expenses and capital allowances. This is not the same as your accounting profit. If the company made a loss, its taxable total profits are nil, so enter 0.
- Enter any distributions the company received from companies outside its group, mainly dividends. A company counts as outside the group here unless it is a 51% subsidiary of this one, a company of which this one is a 51% subsidiary, or a qualifying quasi-subsidiary, so a dividend from a sister company under the same ownership does count. Leave the box empty if there were none. These do not get taxed again, but they do count towards the £50,000 and £250,000 limits (FY2026).
- Enter the number of associated companies, counting this one. If there are none, leave it at 1.
- Enter the accounting period start and end dates. For a short period wholly within FY2026, the limits reduce by actual days in FY2026, not by whole months.
- Tick the box if the company is a close investment-holding company or is not UK resident. Neither the small profits rate nor marginal relief is available to those companies.
Why the next £1 of profit is taxed at 26.5%
This is the part that catches people out. Corporation tax is 19% on profits up to £50,000 and 25% from £250,000 (FY2026). In between, the company pays the main rate less marginal relief, which produces an effective rate that climbs gradually from 19% to 25%.
But the marginal rate, the tax on the next pound earned, is 26.5% throughout that band (FY2026). Earning an extra £1,000 of profit between £50,000 and £250,000 costs £265 in tax, not £250. Each extra pound is taxed at 25% and takes 1.5p of relief away at the same time.
Figures are for a 12 month accounting period, FY2026, with no associated companies and no distributions received from outside the group. That is why timing income and expenditure around the year end can matter more for a company in this band than for one comfortably below or above it.
Associated companies divide the limits
Where a company has associated companies, the £50,000 and £250,000 limits (FY2026) are divided between them. Two associated companies each get limits of £25,000 and £125,000 (FY2026), so a company earning £40,000 pays at the main rate less marginal relief rather than the small profits rate.
A company is generally associated with another where one controls the other, or both are under the control of the same person or persons, and it counts wherever in the world it is tax resident. A company that has carried on no trade or business at any time in the accounting period is left out of the count, and so is a passive holding company that meets the conditions in CTA 2010 s.18F. Where two companies are connected only through the rights of a relative or other associate of a shareholder, they are associated only if there is substantial commercial interdependence between them, so a spouse's unrelated company is not automatically counted. If you are unsure how many of your companies count, that is worth checking before the year end rather than after. Source: HMRC CTM03940, CTM03945 and CTM03950.
Dividends from other companies count towards the limits
The £50,000 and £250,000 limits (FY2026) are not tested against taxable profits. They are tested against augmented profits: the taxable total profits plus exempt distributions of a qualifying kind, mainly dividends, received from companies outside the group. The distribution itself is not taxed again, but it can push the company out of the small profits rate or out of marginal relief altogether.
In FY2026, a company with £45,000 of taxable profit and £20,000 of dividends from a company that is neither its 51% subsidiary nor its parent has augmented profits of £65,000. It is above the £50,000 lower limit, so the small profits rate is not available. Marginal relief is then scaled by taxable profits over augmented profits: 3/200 x (£250,000 minus £65,000) x (£45,000 divided by £65,000) = £1,921. The tax is £11,250 minus £1,921, so £9,329, not the £8,550 that 19% on £45,000 would give.
Three kinds of distribution are left out: one from a 51% subsidiary of the company, one from a company of which the company is itself a 51% subsidiary, and one from a trading company or relevant holding company that is a qualifying quasi-subsidiary. A dividend from a sister company under common control is not left out, even though that sister company is an associated company for the purpose of dividing the limits. Source: CTA 2010 s.18L and HMRC CTM03915.
What this does not cover
- Ring fence profits from oil and gas extraction, which have their own rates
- Patent box profits, taxed at an effective 10%
- Group relief, and losses brought forward or carried back
- Any accounting period not wholly within FY2026, including one straddling 1 April where the rates, limits or fraction may differ between financial years; those periods are split and each part is worked out separately
Companies that are not resident in the UK, and close investment holding companies, get neither the small profits rate nor marginal relief, so they pay the main rate of 25% (FY2026) on all their taxable profits. Tick the box above for those companies.
Common questions
What is marginal relief, in plain terms?
It is a deduction that smooths the jump between the 19% and 25% rates (FY2026). Without it a company earning £250,001 would pay far more than one earning £249,999. The relief is 3/200 of the difference between the upper limit and the company's augmented profits, then scaled by taxable total profits over augmented profits. Where the company received no distributions from outside its group those two figures are the same, so the scaling makes no difference and the relief is simply 3/200 of the gap to the upper limit.
Why is the marginal rate 26.5% when the main rate is 25% in FY2026?
Because as profits rise, marginal relief falls away at the same time. Each extra pound is taxed at 25% and also reduces the relief by 1.5p, and the two together come to 26.5p in the pound across the whole band (FY2026). That holds for a company with no distributions from outside its group. Where there are such distributions the relief is scaled as well as reduced, so the marginal rate is not a flat 26.5%.
Do the thresholds change for a short accounting period?
Yes. Both limits are reduced in proportion to the length of the period. A short accounting period uses actual days. For example, 1 April 2026 to 30 September 2026 has 183 days, so the limits before associates are £25,068.49 and £125,342.47. FY2026 has 365 days.
Does an associated company have to be trading?
No. Carrying on a business is enough, so an investment company can count. What is left out is a company that has carried on no trade or business at all at any time in the accounting period. Where it was associated for only part of the period, the test is applied to that part.
Do dividends the company received count towards the limits?
Yes, unless the company that paid them is a 51% subsidiary of the recipient, a company of which the recipient is a 51% subsidiary, or a qualifying quasi-subsidiary. The limits are tested against augmented profits, which are the taxable total profits plus exempt distributions of a qualifying kind received from companies outside the group in that sense. A dividend from a sister company under the same ownership counts, because a sister company is not a 51% subsidiary, even though it is an associated company for the purpose of dividing the limits.
