Guide
Corporation tax and marginal relief explained
The 19% and 25% rates, why profits between £50,000 and £250,000 are taxed at 26.5% at the margin, and when to pay.
Corporation tax is the tax your limited company pays on its profits. For contractors it’s usually the first and largest tax bill on what you earn, and it has a quirk that surprises people: between £50,000 and £250,000 of profit, each extra pound is taxed at more than the headline main rate.
The 2026/27 rates
- Small profits rate: 19% on profits up to £50,000.
- Main rate: 25% on profits of £250,000 or more.
- Marginal relief in between, which phases the rate up from 19% to 25%.
How marginal relief works
Between the two limits, you work out tax at the main rate of 25% on all the profit, then subtract marginal relief:
Marginal relief = (£250,000 − profit) × 3/200
So on £80,000: main-rate tax is £20,000, marginal relief is (£250,000 − £80,000) × 3/200 = £2,550, and the tax due is £17,450. Because the relief shrinks as profit grows, each extra pound in this band costs 25% plus 1.5% of lost relief: 26.5% in total.
| Taxable profit | Corporation tax | Effective rate | Rate on next £1 |
|---|---|---|---|
| £30,000 | £5,700 | 19% | 19% |
| £50,000 | £9,500 | 19% | 19% |
| £80,000 | £17,450 | 21.81% | 26.5% |
| £120,000 | £28,050 | 23.38% | 26.5% |
| £250,000 | £62,500 | 25% | 25% |
| £300,000 | £75,000 | 25% | 25% |
What counts as taxable profit
Taxable profit is your income minus allowable business expenses: your salary and the employer National Insurance on it, employer pension contributions, accountancy, insurance, software, and capital allowances on equipment. Dividends are not an expense; they’re paid out of profit after corporation tax. That’s why the salary you pay yourself and any pension contributions directly reduce the bill.
Things that change your limits
- Associated companies. If you control (or are connected to) other companies, the £50,000 and £250,000 limits are divided between them.
- Short accounting periods. A first year shorter than 12 months reduces both limits in proportion.
Deadlines
- Pay corporation tax 9 months and 1 day after the end of your accounting period. Most contractor companies pay in one go; only large companies pay in instalments.
- File your company tax return (CT600) within 12 months of the end of the period.
- Annual accounts go to Companies House within 9 months of the year end (a first year can differ).
Ways to reduce it legitimately
- Claim every genuine business expense, including equipment through the annual investment allowance.
- Make employer pension contributions, which are usually deductible and carry no National Insurance.
- Pay a sensible director’s salary: it’s deductible, and the best level is covered in the guide to paying yourself.
This guide is general information, not financial or tax advice. Figures are estimates for England, Wales and Northern Ireland; speak to an accountant before making decisions.