For many years, UK corporation tax return was refreshingly simple, one flat corporation tax rate applied to every company, no exceptions. Such was not the case from April 2023, with the introduction of an entirely separate system that treated small and big businesses very differently, but with a very expensive pitfall right in the middle.
This corporation tax return system creates a situation in which businesses of different sizes pay taxes at different effective rates. A mistake many growing SMEs make is misunderstanding the interplay between their profits and marginal relief, as well as the threshold.
In this guide, we explain the changes to corporation tax, highlight the traps that catch many businesses out, and outline practical steps for planning and compliance. Understanding these elements enables startups and SMEs to manage their taxes efficiently and avoid surprises.
The Three-Tier Structure at a Glance
Since April 2023, corporation tax return has operated under a tiered system. The setup is still the same for the 2026 tax year.
- Businesses earning profits under £50,000 pay at the small profits rate, which is 19%
- Businesses earning more than £250,000 pay the main rate of 25%
- Companies earning profits between these two figures will pay the main rate minus marginal relief. This will give a lower corporation tax rate, anywhere between 19% to 25%.
From its appearance, this appears to be a clear sliding scale. The reality is that there is an additional element that usually takes businesses by surprise.
The Marginal Band: The Most Expensive Territory in the System
The tax for marginal relief is calculated as 3/200 of the excess profit from the £250,000 limit. This means that any pound of income in this particular band will incur a taxation cost of 26.5%. In comparison, the maximum corporate tax that the largest companies pay in Britain is 25%, making the former 1.5% more costly.
Ironically, the rate imposed by the marginal band is more expensive for a company with profits of £150,000 than for one with profits of £400,000. Every single pound that falls within the band generates taxes for the company while decreasing the relief margin. It is crucial for enterprises approaching the £250,000 threshold that the marginal band be considered the most expensive part of the corporation tax rate system.
Why Size Changes Everything
The difference in corporation tax return treatment of small companies is more pronounced than their rates indicate. For a really small company with an income of less than £50,000, there is an automatic 19% flat rate; hence, the change introduced in April 2023 will not have much effect. If a company has income above £250,000, the rate is also flat at 25%, making it easy to figure out and plan for, since there is no need to worry about marginal relief.
The major complications arise for medium-sized growing companies that fall between the two extremes. They should be able to know the marginal relief and figure the 26.5% rate within the band. This is the trickiest aspect of the system.
Associated Companies: An Often-Overlooked Complication
These two thresholds apply to an independent company with a full twelve-month accounting period. Where a business has control over, or is associated with, other companies, the thresholds are then shared among all the companies involved. For instance, where a business director controls two companies, the thresholds are split equally into £25,000 and £125,000.
The same is true of short accounting periods, where the thresholds are adjusted based on the period’s length. Incorrect calculation of either the total number of associated companies or the accounting period length is the biggest corporate tax mistake.
Why Getting the Rates Right Matters for the CT600
Getting the rate wrong has very tangible implications. Getting liability wrong means unnecessary tying up of cash and possible overpayment, while getting it under can result in deficits, which will incur interest and other penalties upon discovering the correct amount.
However, while the CT600 serves as the official declaration for this information, it requires adequate preparation before submission to ensure its accuracy. The calculation of taxable profits, the use of appropriate allowances, the determination of the company’s position with respect to its profits, and the identification of the appropriate rate band must all be done accurately in advance.
Conclusion
However, they vary widely depending on the profit generated, rates are a very important element in business decision-making. Income timing, payment of dividends to directors, investments, and the organisation of group companies, among others, will depend on the application of the different rates. The companies that know where they stand in relation to the rates will not wait until the end of the year to make decisions, but will know what they are doing.
Currently, the tax system encourages companies that plan their activities well. When starting a new business, you will need to consider ways to minimise tax payments. MyIVA will help you map your path to achieving your objectives while minimising your corporation tax rate payments.
