Corporation tax rates, associated companies and marginal relief

How marginal relief works

Tax is first calculated at the main rate on total augmented profits, then reduced by marginal relief. The result is a smooth transition between the two headline rates rather than a cliff edge.

The practical consequence is that profits in the middle band carry a higher marginal cost than either rate on its own. Timing decisions around bonuses, pension contributions and capital expenditure are more valuable when profits sit inside this band.

Associated companies shrink the limits

The lower and upper limits are divided by the number of associated companies. Two associated companies each get half the limits, three get a third, and so on.

Association is based on control, including control by the same person or connected persons where there is substantial commercial interdependence. Dormant companies are generally excluded, but holding structures and family-owned companies frequently create associations directors were unaware of.

• Review group and family shareholdings before each year end
• Consider whether dormant entities should be struck off
• Watch interdependence between separately owned trading companies

Planning levers that remain effective

Employer pension contributions, capital allowances on qualifying plant and machinery, R&D claims where genuinely eligible, and the timing of accruals are the main tools available to most owner-managed companies.

Each must be commercially justified. Accelerating expenditure purely for a tax deduction destroys value if the underlying spend was not needed.