Corporation Tax Small Profits Rate UK Explained

Last updated: 12 November 2026 · Current UK tax year: 2026/27

This article explains the Corporation Tax small profits rate, how it applies to UK limited companies, and what marginal relief means for businesses with profits between £50,000 and £250,000. It is written for limited company directors, freelancers, IT contractors and anyone running a trading company who wants to understand exactly how much Corporation Tax they owe and how to plan around it.

• What is the Corporation Tax small profits rate?
• Corporation Tax rates at a glance for 2026/27
• How marginal relief works
• Augmented profits and associated companies
• Practical examples
• How to reduce your Corporation Tax bill
• When Corporation Tax is due and how to pay
• How NDCA can help
• Frequently asked questions

What is the Corporation Tax small profits rate?

The Corporation Tax small profits rate is the lower rate of UK Corporation Tax that applies to companies with taxable profits up to £50,000. For the 2026/27 tax year, that rate is 19%. Companies with profits above £250,000 pay the main rate of 25%. Companies sitting between those two thresholds pay an effective rate somewhere between 19% and 25%, calculated using marginal relief.

This two-rate structure replaced the flat 19% rate that applied to all companies until April 2023. If your company was incorporated before that date, the change will have affected your tax bill significantly. Many directors still do not fully understand where their company sits in the new structure, which means some are overpaying and others are underproviding.

Why does the small profits rate exist?

The government introduced the two-rate system to target the higher main rate at larger, more profitable companies while giving smaller businesses a lower tax burden. The intent is straightforward: a company making £30,000 profit a year is taxed at 19%, while a company making £500,000 profit pays 25% on all of it. The marginal relief band is designed to avoid a cliff-edge where crossing £50,001 in profit suddenly increases the entire bill at the main rate.

Corporation Tax rates at a glance for 2026/27

Here is a clear summary of the rates that apply in the 2026/27 tax year:

• Small profits rate: 19% on profits up to £50,000
• Marginal relief band: An effective blended rate on profits between £50,000 and £250,000
• Main rate: 25% on profits above £250,000

These thresholds apply to a standard 12-month accounting period. If your accounting period is shorter, the thresholds are reduced proportionally. A nine-month period, for example, would give you a small profits threshold of £37,500 (£50,000 × 9/12).

It is also worth noting that these thresholds are divided between associated companies. If your group has two associated companies, each company’s threshold is halved to £25,000 and £125,000 respectively. This catches many directors who have set up multiple companies without taking advice on the tax consequences.

How marginal relief works

Marginal relief sounds complicated but the principle is simple. HMRC applies a fraction to reduce the amount of tax owed by companies in the middle band. The formula is:

Marginal relief = (£250,000 − augmented profits) × (taxable profits ÷ augmented profits) × marginal relief fraction

The marginal relief fraction for 2026/27 is 3/200. You start with the main rate calculation (25% of your profits), then subtract the marginal relief amount to arrive at your actual tax liability.

What does this mean in practice?

It means that every pound of profit your company earns between £50,000 and £250,000 is effectively taxed at around 26.5%. That is higher than both the small profits rate and the main rate. This is a marginal rate effect, not a mistake. It is the mechanism by which the tax gradually steps up from 19% to 25% across the band.

The practical implication is important: if your company’s profits are approaching £50,000, the next pound of profit costs you more in tax than any pound below that threshold. This makes profit planning, pension contributions and timing of expenditure genuinely worth reviewing each year.

Augmented profits and associated companies

The phrase “augmented profits” appears in the marginal relief formula and in the rules around associated companies. Augmented profits are your taxable profits plus certain exempt distributions received from non-group companies. For most small limited companies, augmented profits equal taxable profits, so you do not need to worry about adjustments unless your company receives dividends from investments in other companies.

Associated companies explained

Two companies are associated if one controls the other, or if both are controlled by the same person or group of persons. HMRC looks at economic, financial and organisational links when deciding whether companies are associated.

This matters enormously for directors who operate more than one company. A director running three companies does not get three sets of £50,000 thresholds. The thresholds are divided by the number of associated companies, so each company’s small profits rate threshold becomes £50,000 ÷ 3 = £16,667. If any one of those companies earns more than £16,667 in profit, it starts entering the marginal relief band.

If you are unsure whether your companies are associated, speak to an accountant before your accounting period ends. Restructuring after the fact is far more difficult and can trigger other tax consequences.

Practical examples

Example 1: profits comfortably within the small profits rate

A sole director running a limited company has taxable profits of £38,000 for the year ended 31 March 2026. The company has no associated companies and a 12-month accounting period.

• Profits: £38,000
• Rate: 19% (small profits rate)
• Corporation Tax due: £7,220

Example 2: profits in the marginal relief band

A limited company has taxable profits of £120,000 for the year ended 31 March 2026. No associated companies.

• Tax at main rate (25% × £120,000): £30,000
• Marginal relief: (£250,000 − £120,000) × (£120,000 ÷ £120,000) × 3/200 = £130,000 × 1 × 0.015 = £1,950
• Corporation Tax due: £30,000 − £1,950 = £28,050
• Effective rate: approximately 23.4%

Example 3: profits above the main rate threshold

A company earns £300,000 taxable profit. It pays 25% on the whole amount: £75,000. No marginal relief applies because profits exceed £250,000.

Example 4: two associated companies

A director controls two companies, each earning £60,000 profit. Because they are associated, the £50,000 small profits threshold is divided by two, giving each company a threshold of £25,000. Each company therefore has £35,000 of profit in the marginal relief band and pays more than 19% on those profits. Combined, this director pays significantly more tax than a director with a single company earning the same total profit of £120,000. Structuring matters.

How to reduce your Corporation Tax bill

There are several legitimate and commonly used ways to reduce the Corporation Tax your company pays. None of them involve doing anything unusual. They are standard tax planning steps that an accountant should be reviewing with you every year.

Pension contributions

Employer pension contributions made by your company are a deductible business expense. They reduce your taxable profits before Corporation Tax is calculated. For a director earning profits in the marginal relief band, a £10,000 employer pension contribution can save up to £2,650 in Corporation Tax (at the effective marginal rate of 26.5%). The pension annual allowance for 2026/27 is £60,000, though this includes contributions from all sources.

Timing of expenditure

If you are planning a significant capital purchase, such as equipment or company vehicles, the timing can affect which accounting period the deduction falls into. Annual Investment Allowance lets companies deduct the full cost of qualifying plant and machinery in the year of purchase. Check the latest HMRC guidance for the current Annual Investment Allowance limit, as it has changed several times in recent years.

Directors’ salaries and dividends

Many director-shareholders pay themselves a small salary up to the National Insurance threshold and take the remainder as dividends. This reduces payroll costs, but dividends are paid from post-tax profits. Getting the split right depends on your personal income tax position and the company’s profit level. In 2026/27, the dividend allowance is just £500, so most dividend income above that is taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate). Take advice before fixing your pay structure for the year.

Research and development relief

If your company spends money developing new products, processes or software, you may qualify for R&D tax relief. The rules changed significantly in April 2024, and the rates differ between SMEs and large companies. Check the latest HMRC guidance or ask your accountant to review your expenditure.

Keep your records in order

Companies miss deductible expenses every year simply because their records are incomplete. Accurate bookkeeping throughout the year means nothing is missed when your accountant prepares your Corporation Tax return. If your records are behind, a bookkeeping catch-up service can get you back on track before your filing deadline.

When Corporation Tax is due and how to pay

For most small companies, Corporation Tax is due nine months and one day after the end of your accounting period. If your accounting period ends on 31 March 2026, your tax is due by 1 January 2027. Your Corporation Tax return must be filed with HMRC within 12 months of the period end.

Large companies with profits above £1.5 million pay in quarterly instalments. This threshold is also divided by associated companies, so a group of three companies may each have a quarterly instalment threshold of £500,000. If you are approaching this territory, speak to an accountant well in advance.

Penalties for late payment

HMRC charges interest on late Corporation Tax payments. The rate is linked to the Bank of England base rate plus a margin, so it changes over time. Check the latest HMRC guidance for the current rate. Late filing of your return also attracts a fixed penalty of £100, rising to £200 for returns more than three months late, with additional tax-geared penalties for returns that are significantly overdue.

Keeping your annual accounts accurate

Your Corporation Tax return is based on your statutory accounts. If your accounts contain errors, your tax calculation will be wrong. This is one of the main reasons it is worth using a professional accountant rather than preparing accounts yourself. Errors in accounts can lead to underpayment of tax, which HMRC will collect with interest, or overpayment, which requires a formal amendment to reclaim.

How NDCA can help

NDCA is an ACCA-regulated accountancy practice that works with UK limited companies, sole traders and landlords on fixed monthly fees. Every client gets a named accountant, not a rotating helpdesk.

We prepare Corporation Tax returns and annual accounts, handle bookkeeping throughout the year, run payroll and produce management accounts so you can see your profit position before your year-end arrives. We also offer cash flow forecasting for companies that want to plan their tax liabilities alongside their working capital.

If you are currently with another accountant and feel you are not getting the advice you need, our switching accountants service makes the move straightforward. We handle the professional handover on your behalf. We work with companies across a range of sectors, including e-commerce, IT contractors, agencies and consultancies, healthcare professionals and tech and SaaS businesses.

Get in touch and NDCA normally replies the same day.

Frequently asked questions

What is the Corporation Tax small profits rate for 2026/27?

The small profits rate is 19% for companies with taxable profits up to £50,000 in 2026/27. This assumes a 12-month accounting period and no associated companies. If your accounting period is shorter, the £50,000 threshold is reduced proportionally.

What is marginal relief and do I qualify for it?

Marginal relief reduces the Corporation Tax owed by companies with profits between £50,000 and £250,000. It tapers the tax bill so that companies in this band pay an effective rate between 19% and 25%. If your profits fall in this range, you should qualify, subject to associated company rules.

How do associated companies affect the Corporation Tax thresholds?

The £50,000 and £250,000 thresholds are divided equally between all associated companies. If you control two companies, each has a small profits threshold of £25,000 and an upper threshold of £125,000. This can significantly increase the tax burden on otherwise small companies within a group.

Can I reduce my Corporation Tax by paying into a pension?

Yes. Employer pension contributions made by your company are a deductible expense and reduce your taxable profits before Corporation Tax is applied. For companies in the marginal relief band, the effective saving can be up to 26.5p for every pound contributed. The pension annual allowance for 2026/27 is £60,000 across all sources.

When does my Corporation Tax need to be paid?

For most small companies, Corporation Tax is due nine months and one day after the end of the accounting period. Your tax return must be filed within 12 months of the period end. Missing these deadlines results in interest charges and fixed penalties from HMRC.

Do sole traders pay the Corporation Tax small profits rate?

No. The Corporation Tax small profits rate applies only to limited companies. Sole traders pay income tax on their profits at the standard income tax rates: 20% basic rate, 40% higher rate and 45% additional rate in 2026/27, based on a personal allowance of £12,570. If you are a sole trader considering incorporation, speak to an accountant about whether a limited company structure would reduce your overall tax bill.