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Corporation Tax Calculation using Marginal Rate Relief

Corporation Tax
Corporation Tax Calculation using Marginal Rate Relief

This article will explain how your corporation tax is calculated, when the small profit rate is applicable and how marginal rate relief is applied.

You will no doubt be aware of the rise of corporation tax to 25% and know that companies with less than £50K profit still get taxed at 19%, companies with over £250K get taxed at the full 25% but what about the ones that fall in the middle of these 2 figures?

If you have done any amount of googling, you will no doubt found a very complicated looking corporation tax calculation for marginal rate relief of:

Marginal relief = F x (U-A) x (N/A).

Hmmm not much help!

As a small business owner, you need a practical guide of how this is applied.

The marginal rate relief is actually calculated first by dividing your accounting period over the financial periods (a financial period for HMRC purposes runs from 1st April to 31st March each year).

Your profit is them apportioned according to the number of days in each financial period. Any days that fall into the financial period ending on or before 31st March 2023 will still be taxed at 19%. 

For any profit that falls after the 1st April 2023, it will be taxed according to how much profit you have once all your expenses and other allowances have been taken into consideration.

If we now look at the 3 different levels of taxation:

If your profits, are £50K or less, you will be taxed at the  small profit rate of 19%. In your CT600 the corporation tax calculation of your small profit rate will be displayed (the example below is based on profits of £40K):

Easy Digital Tax and accounting information -  small profit rate

As you can see the corporation tax calculation is unchanged from the calculation pre April 2023.

If your profits are above £250K then you will be taxed at 25%. Therefore the small profit rate of 19% will not be applied and there will be no marginal rate relief either. Your corporation tax calculation will look like (based on profits of £300K):

Easy Digital Tax and accounting information - Corporation tax calculation

You will notice that box 329 of the CT600 is not checked in this example as neither Marginal Rate Relief or Small Company rate is applicable.

If your profit is greater that £50K but less than £250K then the Marginal Rate Relief will be applied. The effect will be on a sliding scale where the percentage of corporation tax gradually increases.

Marginal Rate is calculated according to the number of days in the period after 1st April 2023. The upper rate of £250K will also be apportioned, along with your total profit. 

Therefore if your period end date is 31st May 2023, there are only 61 days in the period from the 1st April 2023 to 31st May 2023.  Your total profit will be apportioned across the 61 days as will the upper limit of £250K. This means for a profit of £100K your CT600 corporation tax calculation will look like:

Easy Digital Tax and accounting information -  small profit rate

As you can see box 329 is checked meaning that either the small profit rate or marginal rate relief is applied. However, initially the profit that falls into the financial year starting April 2023, is taxed at 25%. The marginal rate relief is then applied in CT600 box 435 and reduces the overall corporation tax.  Pre April 2023 the tax on £100K would have been 19%, with just 61 days falling in the period starting 1st April 2023, you will pay an additional £629.69 in corporation tax.

There are a few other gotchas to be aware of!

  • If you are an overseas company you will not be eligible to claim marginal rate relief.
  • If you have ABGH income (dividend income taxed at source) this will be added into your total profits and used in the calculation of relief, thus reducing your relief/small profit rate. 
  • If you have associated companies or are part of  a group, the number of associated companies must be declared. The Marginal rate relief/small profit rare will be divided between all the companies , so will reduce down the relief each company can claim in the corporation tax calculation.

These will all be calculated in our software, so you will be able to continue to use our templates without having to complete these complicated calculations.  Please Log on to get started.

Author: Cathy Chambers

Cathy is one of the Founders and is the CEO of Easy Digital. She has a extensive background in business, personnel, accounting and Finance. Having a career spanning 30 years which includes working at large multi-national companies as well as startups.

Read All articles by Cathy Chambers
This article is information only and has been prepared for general guidance on matters of interest only, and does not constitute legal, accounting, tax, investment or other professional advice or services. You should not act upon the information contained in this article without obtaining specific professional or legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this article, and, to the extent permitted by law, Comdal Limited, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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