Ask most owner-directors what rate of corporation tax their company pays and you get one of two answers: 19%, because that is what it always was, or 25%, because that is the number in the headlines. For a great many limited companies both answers are wrong, and the real one is worse than either.
There are only two corporation tax rates. The small profits rate is 19%, and it applies where profits are £50,000 or less. The main rate is 25%, and it applies where profits are over £250,000. Between those two limits, you are charged at 25% and then given Marginal Relief to soften the landing. That relief is withdrawn gradually as profits climb — and because it is being taken away at the same time as tax is being charged, the rate on each extra pound in that band is not 19% and not 25%. It is 26.5%. These rates and limits have applied since the financial year beginning 1 April 2023 and are unchanged for the year to 31 March 2027.
Twenty-six and a half pence in the pound is the single most useful number in small-company tax planning, because it is the number every decision is actually priced at. Most owners have never seen it, because it does not appear on the tax return, in HMRC's rates table, or in the accounts.
The maths, once, so you can check your own accounts
Where a company has no associated companies and a full twelve-month accounting period, the calculation is:
Corporation tax = (25% × profits) − (3 ÷ 200 × (£250,000 − profits))
That 3/200 is the standard Marginal Relief fraction set in legislation. It is 1.5%, and 1.5% is exactly the gap between the 25% main rate and the 26.5% you actually feel in the band.
Take a company with £120,000 of taxable profit for the year to 31 March 2027:
- 25% of £120,000 = £30,000
- Marginal Relief = 3/200 × (£250,000 − £120,000) = 1.5% × £130,000 = £1,950
- Corporation tax due = £28,050
That is an average rate of 23.4%, which looks reassuring and tells you nothing useful. Now run the same company at £130,000 of profit:
- 25% of £130,000 = £32,500
- Marginal Relief = 1.5% × £120,000 = £1,800
- Corporation tax due = £30,700
The extra £10,000 of profit cost £2,650 in tax. That is 26.5%, and it is the number to keep in your head all year.
Why 26.5% changes decisions that 19% would not
Every pound of allowable cost inside the marginal band is worth 26.5p back, not 19p. That is a 39% bigger benefit than most owners assume, and it moves the answer on several ordinary decisions.
Take the same company at £130,000 of profit, and a director's pension contribution of £10,000 made by the company before the year end. It is an allowable deduction, so profit drops to £120,000 and the tax bill drops from £30,700 to £28,050. The £10,000 contribution costs the business £7,350 after tax. Made in a year when profits were sitting under £50,000, the same £10,000 would cost £8,100. Same contribution, £750 difference, purely on timing.
The same logic applies to equipment bought before the year end, a bonus voted before the year end, repairs brought forward, or a genuine cost sitting in a drawer because nobody sent the receipt over. In a marginal-band year, every £1,000 of real cost you fail to claim is £265 of tax you did not need to pay. This is exactly what management accounts are for — knowing in month nine roughly where the profit will land, while you still have three months to do something about it. Finding out in the following January is a report, not a decision.
The associated company trap, which is where the real money is
Here is the part that catches people, and it is worth more than everything above. The £50,000 and £250,000 limits are divided by the number of associated companies plus one. Own two companies and each gets £25,000 and £125,000. Own three and each gets £16,667 and £83,333.
A company is associated with yours if one controls the other, or both are under common control, at any time in the accounting period. Where the other company is controlled by an associate — a spouse, for instance — it only counts if there is substantial commercial interdependence between the two, meaning financial, economic or organisational links; any one of the three is enough, and HMRC sets out the tests in its Company Taxation Manual. A company that has not carried on a trade or business at any point in the period is ignored, so a genuinely dormant shell costs you nothing.
Put figures on it. Our company still has £120,000 of profit. But the director also owns a second company that lets out a commercial unit — small, quiet, profitable enough to be a business. That is one associated company, so the limits halve to £25,000 and £125,000:
| Trading company with £120,000 profit | Standalone | With one associated company |
|---|---|---|
| Upper limit | £250,000 | £125,000 |
| Tax at 25% | £30,000 | £30,000 |
| Marginal Relief | £1,950 | £75 |
| Corporation tax | £28,050 | £29,925 |
The property company cost the trading company £1,875 in extra corporation tax, and it will do so again every year. Nothing changed in the trading business. Nobody sent a letter. It is simply the arithmetic of a share register that grew over time — and it is the single most common reason a corporation tax bill comes in higher than the owner expected.
Short accounting periods do the same thing on a smaller scale. Shorten a year to nine months and the limits drop proportionately, to £37,500 and £187,500, so profit that would have sat safely under £50,000 can land in the marginal band.
Four things to do this week
- Work out your marginal rate, not your average one. Take last year's taxable profit, divide the £50,000 and £250,000 limits by the number of companies you or your family control that traded, and see which band you are in. If you are between the two adjusted limits, your planning number for the year is 26.5p in the pound.
- Count your companies properly — from Companies House, not memory. Search your own name as an officer and a person with significant control, and your spouse's, and write the list down. Include property companies, side ventures and anything that invoiced anyone. Exclude only companies that did no business at all in the period.
- Get a profit forecast in front of you before month nine. Decisions worth 26.5p in the pound have to be made while there is still time to make them. A forecast in month nine is worth more than perfect accounts in month fifteen.
- Bring forward what you were going to spend anyway. Pension contributions, equipment, bonuses, repairs, subscriptions already committed. Not spending for the sake of it — spending you had already decided on, landed in the year where it is worth the most.
One number that is easy to get wrong
The limits are tested against augmented profits, which is your taxable total profits plus certain dividends received from companies outside your group. The tax itself is charged on taxable total profits. For most owner-managed companies the two are the same figure and it makes no difference. If your company holds shares in businesses it does not control and receives dividends from them, it can be pushed into a higher band by income that is not itself taxed — worth checking rather than assuming.
Where we come into this
None of this is aggressive planning. It is knowing which band you are in, counting your companies correctly, and making ordinary spending decisions in the right order. Most of the value sits in the twelve weeks before a year end, which is why we build it into the routine rather than raising it when the accounts are already filed.
If you are a limited company owner and you are not certain which band your profits land in — or how many associated companies you have — that is a short conversation with a clear answer. Our tax planning work and our accountancy packages both include the year-end review that catches this. Book a discovery call and bring last year's accounts.