How to calculate corporation tax and apply marginal relief

As a UK limited company, you will be required to file a Corporate Tax Return at the end of your 13th month in business and each year thereafter. Understanding how much you will be due to pay is essential but you should also be eager to embrace any tools that allow you to reduce your financial obligations. Marginal relief is one such item that you need to know.

What are Corporation Tax and marginal relief?

Corporate Tax is the tax that all limited companies pay on their profits gained from trading activities, investments, and/or selling assets. Taxable profits are calculated by subtracting expenses, capital allowances, and any losses that have been brought forward. This figure is then multiplied by the Corporation Tax Rate of 25% to determine the overall Corporation Tax figure.

While the fundamental formula is pretty easy to understand, calculating Corporation Tax can be a challenge. However, several platforms are available to guide you through the process of preparing the accounts while an HMRC Corporation Tax calculator will help you work out the figure – this is a great tool for estimating future tax requirements baked on your forecasted profits.

Corporate Tax is a major financial obligation but several features can legitimately reduce the amount of money due. Marginal relief is available to companies that have annual profits of between £50,000 and £250,000. While companies earning under £50,000 do not qualify for marginal relief, their tax rate is reduced to 19% – this is referred to as a small profits rate. Meanwhile, unit trusts and open-ended, investment companies pay a 20% rate.

This type of relief is designed to compensate for the fact that the main Corporate Tax ratio increased to 25%. Furthermore, it is automatically applied to Corporation Tax returns, which should subsequently be paid within nine months of filing them. However, it should be noted that a company that has an associate business will see the lower and upper thresholds fall to £25,000 and £125,000 respectively.

Why does it help to calculate marginal relief?

When planning your tax return, an accurate prediction of how much you’ll need to pay is vital for many reasons. As such, even a relatively small relief figure should be accounted for. It can help reduce stress, help you restructure your payment over the next nine months, and make calculated business decisions.

Besides, to work out marginal relief, you will first need to know the full details of your Corporate Tax Return and supporting documents. So, you’ll have even greater accuracy and would have completed the financial admin before the deadline. It’s great news for your peace of mind and allows you to shift your focus back to actively running the company.

Who is exempt from marginal relief?

As already stated, only companies that register profits of £50,000-£250,000 will be eligible for marginal relief. However, there are several other exemptions that businesses should know. They are overseas companies, even when they have operations in the UK and any company that has an ABGH income.

Meanwhile, it should be noted that it came into effect from 1st April 2023. Relief will subsequently be apportioned to accurately reflect the number of days within the accounting period that were coveted by this. For example, if the account is filed on 31st July, the relief only covers 121 days.

How to calculate marginal relief

Marginal relief is set to 1.5% of the difference between your company’s profits and the £250,000 figure. So, if the company made £100,000 in taxable profits for the accounting period, the calculator is as follows;

• £250,000 – £100,000 = £150,000.
• £150,000 x 1.5% = £2,250.
• Marginal relief due = £2,250.

Given that the main Corporation Tax rate is currently 25%, you can quickly work out the total bill. Without marginal relief, the amount of tax due is £25,000 (25% of the £100,000). However, with marginal relief applied, the revised figure is £22,750.

For a company that is still in the early phase of establishment and growth, financial relief makes a significant impact.

The final word

Knowing how to calculate Corporation Tax and apply marginal relief, which helps bridge the gap between the small profits rate and the main rate, will go a long way to helping you manage your tax obligations.

Finally, business owners should remember that there is a 12-month window to make amendments if they notice a mistake at a late date. When filed with the support of dedicated software, though, this should not be an issue.