Corporation tax rates and small profits relief

Understanding the Corporation Tax rate structure following Finance Act 2022 changes. Covers the 25% main rate, 19% small profits rate, marginal relief for profits between £50,000 and £250,000, associated companies rules, and quarterly instalment requirements.

UK-wide
Guide summary

Check which Corporation Tax rate applies to your company based on its taxable profits. From April 2023, rates range from 19% (profits up to £50,000) to 25% (profits over £250,000). If profits are between £50,000 and £250,000, you may get marginal relief.

  • Pay 19% tax if profits are £50,000 or less
  • Pay 25% tax if profits are over £250,000
  • Use marginal relief for profits between £50,000-£250,000
  • Divide thresholds by number of associated companies
  • Marginal relief avoids sudden jumps in tax
  • Effective rate in marginal band ranges from 19%-25%
  • Tax applies to accounting period, not calendar year
  • Check if accounting period straddles April 2023
  • technical terms on first use)"
  • Structure: what it is (1 sentence) → who it affects (1 sentence) → what you must do (numbered list) → key facts (bullet list) → where to get help (1 sentence)
  • UK English spelling
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Related guides in Tax & Finance

How Corporation Tax rates work since April 2023

The Corporation Tax rate structure changed significantly from 1 April 2023 under the Finance Act 2022. The single 19% rate was replaced with a tiered system based on your company's taxable profits.

This applies to all UK limited companies - whether you're a startup, established business, or holding company. Understanding which rate applies to you is essential for cash flow planning and tax efficiency.

The three-tier rate structure

Corporation Tax now operates on three tiers:

Small Profits Rate
19% on profits up to £50,000
Main Rate
25% on profits over £250,000
Marginal Relief Band
Effective rate 19%-25% for profits between £50,000-£250,000
Effective marginal rate
26.5% in the marginal relief band (due to taper)
Rate change effective
1 April 2023 (Finance Act 2022)

What this means in practice

The rate you pay depends entirely on your taxable profits (not turnover):

  • Profits up to \u00A350,000: You pay 19% - unchanged from the previous flat rate
  • Profits over \u00A3250,000: You pay 25% on all profits, not just the excess
  • Profits between \u00A350,000 and \u00A3250,000: You benefit from marginal relief - a gradual taper that smooths the transition from 19% to 25%

Important: The rates apply to profits for the accounting period, not calendar year. If your accounting period straddles 1 April 2023, profits are time-apportioned.

PROFIT £50,000

Small Profits Rate: 19% Corporation Tax

Companies with taxable profits of \u00A350,000 or less pay Corporation Tax at 19% - the same rate that applied to all companies before April 2023.

Above threshold:

Your profits exceed \u00A350,000 so you enter the marginal relief band. You won't pay 25% on all profits immediately - marginal relief tapers the effective rate gradually.

Below threshold:

You pay 19% Corporation Tax on all your profits. No marginal relief calculation needed. Example: \u00A340,000 profit = \u00A37,600 Corporation Tax.

Corporation Tax rates on GOV.UK (opens in a new tab)

Marginal relief explained

Marginal relief prevents a sudden jump in tax when your profits exceed \u00A350,000. Without it, earning \u00A350,001 would dramatically increase your tax bill. Instead, the effective rate increases gradually across the \u00A350,000 to \u00A3250,000 band.

Practical worked examples

Understanding marginal relief is easier with examples:

Example 1: \u00A360,000 profit (just above small profits threshold)

  • Tax at main rate: \u00A360,000 x 25% = \u00A315,000
  • Marginal relief: 3/200 x (\u00A3250,000 - \u00A360,000) = 3/200 x \u00A3190,000 = \u00A32,850
  • Tax payable: \u00A315,000 - \u00A32,850 = \u00A312,150
  • Effective rate: 20.25%

Example 2: \u00A3150,000 profit (midpoint of band)

  • Tax at main rate: \u00A3150,000 x 25% = \u00A337,500
  • Marginal relief: 3/200 x (\u00A3250,000 - \u00A3150,000) = 3/200 x \u00A3100,000 = \u00A31,500
  • Tax payable: \u00A337,500 - \u00A31,500 = \u00A336,000
  • Effective rate: 24%

Example 3: \u00A3240,000 profit (near upper threshold)

  • Tax at main rate: \u00A3240,000 x 25% = \u00A360,000
  • Marginal relief: 3/200 x (\u00A3250,000 - \u00A3240,000) = 3/200 x \u00A310,000 = \u00A3150
  • Tax payable: \u00A360,000 - \u00A3150 = \u00A359,850
  • Effective rate: 24.94%
INFORMATION

The 26.5% effective marginal rate

Counter-intuitive fact: Within the marginal relief band, the effective tax rate on each additional pound of profit is actually 26.5%, not 25%.

This is because the marginal relief reduces as profits increase. For every \u00A31 more profit, you lose 1.5p of marginal relief while paying 25p more tax - a combined 26.5p marginal rate.

Tax planning implication: There's no benefit to artificially keeping profits just below \u00A3250,000. The taper ensures you always benefit from earning more.

<p>This 26.5% rate only applies to the <em>marginal</em> pound of profit within the band. Your average effective rate remains between 19% and 25% across the whole band.</p>
HMRC marginal relief guidance (opens in a new tab)

Associated companies: How they affect your thresholds

If you control more than one company, the profit thresholds are divided equally between all associated companies. This is designed to prevent tax avoidance through splitting a business into multiple companies.

This is one of the most commonly overlooked rules - many business owners don't realise their property company, trading company, and holding company are all associated.

Common associated company scenarios

Scenario 1: Husband and wife each own a company

If each spouse owns 100% of their own company but they're married, the companies may still be associated through the "connected persons" rules. Control by connected persons (including spouse) can be attributed.

Scenario 2: Trading company and property company

A common structure where a business owner has:

  • Company A - Trading operations
  • Company B - Property holding (rents premises to Company A)

If the same person controls both, they're associated. The \u00A350,000 threshold becomes \u00A325,000 each.

Scenario 3: Group structure with subsidiaries

A holding company with 3 wholly-owned subsidiaries = 4 associated companies. Small profits threshold becomes \u00A312,500 each.

Scenario 4: Dormant companies

Companies with no significant accounting transactions (dormant) are excluded from the count. A trading company plus a dormant holding company = 1 company for threshold purposes.

When to pay: The 9 months + 1 day rule

Corporation Tax payment timing is often misunderstood. You must pay before you file your return.

Payment vs filing: A crucial distinction

Obligation Deadline Example (31 March 2025 year end)
Pay Corporation Tax 9 months + 1 day 1 January 2026
File CT600 return 12 months 31 March 2026

Consequence: You must estimate and pay your Corporation Tax liability approximately 3 months before you finalise and file your Company Tax Return. This requires good management accounts throughout the year.

Large companies: Quarterly instalment payments

Once your company's profits exceed \u00A31.5 million, you can no longer pay Corporation Tax as a single lump sum 9 months after year end. Instead, you must pay in four quarterly instalments.

Why this matters for growing businesses: Crossing the \u00A31.5m threshold for the first time triggers a significant cash flow change - you'll be paying Corporation Tax during your accounting period, not afterwards.

The quarterly instalment schedule

For companies with profits between \u00A31.5m and \u00A320m (large but not very large):

  • Instalment 1: 14 days after month 6 ends (month 7)
  • Instalment 2: 14 days after month 9 ends (month 10)
  • Instalment 3: 14 days after month 12 ends (month 13 - after year end)
  • Instalment 4: 14 days after month 15 ends (month 16)

Each instalment = 25% of estimated annual Corporation Tax liability.

Example: December year end, \u00A32m profit

  • Estimated Corporation Tax: \u00A32m x 25% = \u00A3500,000
  • Per instalment: \u00A3125,000
  • 14 July (month 7) - pay \u00A3125,000 while still trading
  • 14 October (month 10) - pay \u00A3125,000
  • 14 February (month 13) - pay \u00A3125,000 after year end
  • 14 May (month 16) - pay \u00A3125,000

Annual Investment Allowance

The Annual Investment Allowance (AIA) lets you deduct the full cost of qualifying plant and machinery from your profits in the year of purchase. This directly reduces your Corporation Tax bill.

Current AIA limit
£1 million per year (permanent)
Qualifying assets
Plant, machinery, equipment, some fixtures
Excluded assets
Cars, items for leasing, gifts
Tax benefit at 25% rate
£1m spend = £250,000 tax saving
Tax benefit at 19% rate
£1m spend = £190,000 tax saving

Strategic use: If you're planning significant capital expenditure, timing purchases within your accounting period can reduce your Corporation Tax liability. A \u00A3200,000 equipment purchase saves \u00A350,000 at the 25% rate.

Companies only: Full expensing (100% first-year allowance) is also available for companies on main rate pool assets, providing similar benefits beyond the \u00A31m AIA limit.

Tax planning considerations

The tiered rate structure creates several planning opportunities:

1. Timing of income and expenses

If profits are near a threshold boundary, consider timing:

  • Accelerating expenses: Bring forward allowable expenses (repairs, professional fees) to reduce taxable profits below a threshold
  • Deferring income: Where contractually possible, delay invoicing to the next period
  • Capital allowances: Time equipment purchases to maximise AIA in high-profit years

2. Salary vs dividend extraction

The Corporation Tax rate affects the optimal mix of salary and dividends for owner-managers:

  • At 19% CT rate: Dividend extraction often more tax-efficient
  • At 25% CT rate: The gap narrows; salary may become more attractive in some cases

3. Group relief

Companies in the same 75% group can surrender losses between them. A loss-making subsidiary can surrender losses to a profitable parent, reducing the group's overall Corporation Tax.

Common mistakes to avoid

  • Forgetting associated companies: Your property company and trading company share the thresholds. Review all companies under your control.
  • Missing quarterly instalment obligations: First-time large companies often don't realise they need to pay during the accounting period. Interest charges apply from day 1.
  • Confusing turnover with profit: Corporation Tax rates are based on taxable profits, not revenue. A \u00A32m turnover business with \u00A340,000 profit pays 19%.
  • Paying late: Interest accrues at Bank of England base rate + 4% (currently 8%) from the day after deadline. Even one day late triggers charges.
  • Not planning for marginal relief: The 26.5% effective marginal rate in the band means keeping accurate management accounts is essential for cash flow planning.
  • Ignoring short accounting periods: Thresholds are proportionally reduced for accounting periods shorter than 12 months. A 6-month period has a \u00A325,000 small profits threshold.