How to Calculate Marginal Relief for Corporation Tax

24/12/2022 - 7 minutes read

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How to calculate Marginal Relief for Corporation Tax has been a frequently asked question by our clients due to the introduction of the small profits rate of corporation tax from 1 April 2023.

Use HMRC’s calculator

From 1 April 2023, the main rate of Corporation Tax is increasing to 25% for companies with profits over £250,000.

A small profits rate of 19% is being introduced for companies with profits of £50,000 or less, and Marginal Relief will apply for profits greater than £50,000 (the lower limit) up to £250,000 (the upper limit).

Marginal Relief provides a gradual increase in the Corporation Tax rate between the small profits rate and the main rate.

HMRC has launched a new online service – you can use this link to calculate marginal relief for Corporation Tax from 1 April 2023.

This service allows companies and their agents to accurately calculate the amount of Marginal Relief applicable to a company’s profits falling between £50,000 and £250,000.

Before using the service, you need to know:

– the company’s accounting period start and end dates
– the company’s total taxable profit
– the amount of any distributions from non-group, un-associated companies
– any associated company details

Note that the lower and upper limits are proportionately reduced for short accounting periods and the number of associated companies of the reference company.

Manual calculation

Marginal Relief for Corporation Tax (MSCR) tapers the effect of the increased rate.

To calculate Marginal Relief for Corporation Tax, we can use this formula:

(Upper Limit – Profits) x Basic profits/Profits x MSCR fraction where

- – Upper Limit is £250,000
- – Basic profits are the companies trading profits/gains
- – Profits are Basic Profits plus Franked Investment Income (FII is generally Dividends from other companies)
- – MSCR Fraction is 3/200ths

There is however a simpler way to Calculate Marginal relief for Corporation Tax and the effective applicable tax rates on profit bands:

Profit Bands	Applicable Tax rate
£0 to £50,000	19%
£50,000 to £249,999	26.5%
Over £250,000	25%

The above-listed profit bands give the same result as the full formula and are easier to remember & use, but they also show up the fact that a small business making a profit of between £50,000 and £249,999 with no associated companies will pay an effective corporation tax rate of 26.5% which is higher than the large company corporation tax rate of 25%.

As an example. the Effective rate of Corporation Tax for a business with no associated companies at various profit levels will be:

Profits	£50,000	£75,000	£100,000	£150,000	£200,000	£250,000
Effective CT %	19.00%	21.50%	22.75%	24.00%	24.63%	25.00%

This Effective Rate applies to the whole of the profits of a company.

Corporation Tax Rate Increase in 2023 from 19% to 25%

Corporation Tax Rate will Increase in 2023 from 19% to 25% thereby giving rise to the need to calculate Marginal relief for Corporation tax on company profits between £50,000 and £249,999

Associated companies

Associated Companies are Companies under common control. The rules around this are complex, but generally, they look at different groupings of individuals who control a company, and the commonality within those groupings. In practical terms Companies will be associated where:

They are controlled by the same individual, eg:
- – Mr A owns 100% of X Limited and 100% of Y Limited – the companies will be Associated
- – Mrs B owns 100% of X Limited and 80% of Y Limited – the companies will be Associated
- – Mrs C owns 100% of X Limited and 20% of Y Limited – the companies will not be Associated
They are controlled by the same group of individuals, albeit with differing shareholdings, eg:
- – Company A is owned 80% by Mr X and 20% by Miss Y; Company B 45% each by Mr X and Miss Y, and 10% by Mrs Z. A and B will be connected by virtue of Mr X and Mrs Y despite the shareholdings differing
In some circumstances, the rights of family members (spouse and blood relations) are included, where there is a commercial interdependence between two companies. Eg:
- – Mr A owns 100% of X Limited, and Mrs B 100% of Y Limited – If A Limited and B Limited have no commercial interdependence the companies will not be Associated – if there is a commercial interdependence they will be associated.

HMRC also look at the following to determine the association between 2 companies:

Financially interdependent

Two companies are ‘financially interdependent’ if one gives financial support (directly or indirectly) to the other, or each has a financial interest in the affairs of the same business.

Economically interdependent

Two companies are ‘economically interdependent’ if the companies seek to realise the same economic objective, the activities of one benefit the other, or the companies have common customers.

Organisationally interdependent

Two companies are ‘organisationally interdependent’ if (in particular) the businesses of the companies have or use common management, common employees, common premises, or common equipment.