Advanced Taxation (UK) · Mitigation of tax by numerical analysis and reasoned argument

Corporation Tax Planning: Rates, Marginal Relief and Instalments

Updated 11 October 2026 · Fact-checked

Corporation tax planning in ATX-UK means using the small profits rate, marginal relief and payment dates to cut or defer company tax. Compare augmented profits with the limits, divide the limits by associated companies plus one, apply marginal relief, then test whether quarterly instalments apply.

Understand Corporation Tax Planning: Rates, Marginal Relief and Instalments

A UK company pays corporation tax on its taxable total profits. The rate depends on its augmented profits. Augmented profits are taxable total profits plus exempt distributions received from non-group companies. If augmented profits are at or below the lower limit of £50,000, the 19% small profits rate applies. If they are above the upper limit of £250,000, the 25% main rate applies.

Between the two limits, the company pays the main rate and then claims marginal relief. This gives an effective rate between 19% and 25%. In that band the extra tax on each extra £1 of profit is higher than 25%, so the band is a planning target. Deferring income or accelerating deductions can pull profits down and save tax.

The limits are not fixed per company. They are divided by the number of associated companies plus one. Companies are generally associated when one controls the other, or both are under common control. Overseas companies can count. A company that is dormant throughout the period is generally not counted. The limits are also reduced pro rata if the accounting period is shorter than 12 months. A group of companies can therefore lose the small profits rate very quickly.

Timing matters too. A company with profits above the threshold of £1,500,000 is large and pays by quarterly instalments during the year, not nine months after the year end. The threshold is also divided by associated companies plus one and time-apportioned. Planning aims to stay under the threshold, or at least to estimate profits accurately. Underpaid tax carries interest at 8.50% and overpaid tax earns interest at 3.50%, using the assumed rates in your tax tables.

In the exam you must do the numbers and then argue. Show the saving, say what it depends on, and mention the risks and the cash flow effect.

Key rules to remember

Augmented profits: Augmented profits = Taxable total profits + exempt distributions from non-group companies; Use this figure, not taxable total profits alone, to compare with the limits.
Rates and limits (FY2023, 2024, 2025): Augmented profits ≤ £50,000: 19%. Augmented profits ≥ £250,000: 25%. In between: 25% less marginal relief; These are the limits for a single company with no associated companies and a 12-month period. They are given in the exam tax tables.
Marginal relief: (Upper limit – Augmented profits) × 3/200 × Taxable total profits ÷ Augmented profits; The standard fraction is 3/200. Deduct the relief from tax at 25% on taxable total profits. If there are no distributions, the last fraction is 1.
Adjusting the limits: Limit ÷ (number of associated companies + 1), then × months in period ÷ 12; Adjust the lower limit, the upper limit and the £1,500,000 instalment threshold in the same way.
Large company test: Taxable total profits > £1,500,000 (adjusted); Instalments are normally due in months 7, 10, 13 and 16 from the start of a 12-month period, on the 14th day. Each is 25% of the estimated liability. Very large companies (profits over £20 million, also adjusted) pay earlier, in months 3, 6, 9 and 12. Check the question for what you need.
Interest on tax: Underpaid tax 8.50%, overpaid tax 3.50%; Assumed rates from the tax tables. Use them to cost late payment or to value early payment.

How to solve Corporation Tax Planning: Rates, Marginal Relief and Instalments questions

Use the same method for any question on rates, marginal relief or instalments.

1Identify the accounting period length and the number of associated companies. Exclude companies dormant throughout the period only if the facts say so.
2Adjust the limits: divide £50,000, £250,000 and £1,500,000 by associated companies plus one, then time-apportion for a short period.
3Calculate taxable total profits and then augmented profits by adding exempt distributions from non-group companies.
4Decide the band: small profits rate, main rate, or marginal relief. Compute tax at 25% and deduct marginal relief where relevant.
5Test the instalment position against the adjusted £1,500,000 threshold. If it applies, state the dates and the amounts.
6For planning, recompute the tax under the alternative, such as lower profits, fewer associated companies or a different timing. Show the saving or deferral as a figure.
7Conclude with reasoned advice: the saving, the cash flow effect, any interest at 8.50% or 3.50%, and the risks or conditions.

Quickest way: Band check and marginal rate shortcut

When to use it: Use when you need quick planning figures, such as the effect of moving £10,000 of profit between periods or companies.

Adjust the limits first. Most lost marks come from using £50,000 and £250,000 unadjusted.
If augmented profits are between the limits, the extra tax on each extra £1 of profit is 26.5% (when there are no distributions). Use it as a quick check on the effect of a change in profit.
If a change moves profits fully into the 19% band or fully out of the 25% band, calculate tax before and after in full.
Check the instalment threshold once, using the adjusted figure. If profits are well below it, say no instalments are required and move on.

Common mistakes in Corporation Tax Planning: Rates, Marginal Relief and Instalments

Using the £50,000 and £250,000 limits for a company that has associated companies.
The tax table shows only the single-company limits, so students use them directly.
Fix: Always read the question for associated companies. Divide both limits by associated companies plus one.
Ignoring a short accounting period.
Students focus on the profit calculation and forget the time apportionment.
Fix: Multiply the adjusted limits by months ÷ 12. Do the same for the £1,500,000 threshold.
Using taxable total profits instead of augmented profits to test the band.
Exempt distributions from non-group companies are hidden in the question.
Fix: Add them to taxable total profits to get augmented profits. Use that figure for the band test and in the marginal relief formula.
Applying the marginal relief fraction to the wrong profit figure.
The formula has three parts and students mix them up.
Fix: Write (upper limit – augmented profits) × 3/200 × taxable total profits ÷ augmented profits, then subtract the result from tax at 25%.
Giving planning advice with no numbers or conditions.
Students treat tax planning as general discussion.
Fix: Compute tax under both options, state the saving, then add the conditions, cash flow effect and risks.
Forgetting that instalment dates depend on the period and the size of the company.
Students memorise only the nine-months-after-year-end rule.
Fix: Check the adjusted threshold. If the company is large, quote the instalment dates and 25% payments.

Worked examples

Example 1

Kestrel Ltd has no associated companies. For the 12 months to 31 March 2026 it has taxable total profits of £180,000 and no distributions received. Calculate its corporation tax liability and say whether it must pay by instalments.

Show the solution

Augmented profits = £180,000. This is between £50,000 and £250,000, so marginal relief applies.
Tax at 25% = £180,000 × 25% = £45,000.
Marginal relief = (£250,000 – £180,000) × 3/200 × (£180,000 ÷ £180,000) = £70,000 × 0.015 = £1,050.
Corporation tax = £45,000 – £1,050 = £43,950.
Instalment threshold is £1,500,000 with no associated companies. Profits of £180,000 are below it, so Kestrel is not large and pays in one amount nine months and one day after the end of the period.

Answer: Corporation tax is £43,950. No instalments are required.

Example 2

Falcon Ltd has two associated companies. For a 12-month period its taxable total profits are £60,000 and it has no distributions. One of the associated companies has been dormant throughout the period. Calculate the tax saving if that dormant company is excluded.

Show the solution

If all three companies are counted, the divisor is 3. Upper limit = £250,000 ÷ 3 = £83,333. Lower limit = £50,000 ÷ 3 = £16,667. Profits of £60,000 are between them.
Tax at 25% = £15,000.
Marginal relief = (£83,333 – £60,000) × 3/200 = £23,333 × 0.015 = £350. Tax = £14,650.
Excluding the dormant company leaves one associated company, so the divisor is 2. Upper limit = £125,000. Lower limit = £25,000. Profits are still between them.
Marginal relief = (£125,000 – £60,000) × 3/200 = £65,000 × 0.015 = £975. Tax = £15,000 – £975 = £14,025.
Saving = £14,650 – £14,025 = £625.
Instalments: the threshold is £1,500,000 ÷ 2 = £750,000. Profits of £60,000 are far below, so no instalments.

Answer: Tax is £14,650 counting the dormant company and £14,025 excluding it, a saving of £625. This depends on the company really being dormant throughout the period. No instalments are due.

Exam tips

Do the limits adjustment first and show it as a working. Method marks are given even if a later figure is wrong.
Read the question for associated companies, short periods and dividends from non-group companies. Each changes the answer.
In planning questions, state the saving as a figure, then give the conditions and risks. This earns the professional skills marks.
Use the 8.50% and 3.50% interest rates from the tax tables when you comment on late or early payment. Do not invent other rates.
If the question gives the facts, test the instalment threshold. Show the dates and 25% amounts only when the company is large.

Practice questions from Mitigation of tax by numerical analysis and reasoned argument

Corporation Tax Planning: Rates, Marginal Relief and Instalments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Applied SkillsCorporation Tax Rates and Marginal Relief

Corporation Tax Planning: Rates, Marginal Relief and Instalments: frequently asked questions

What is marginal relief in corporation tax?

It is a reduction in tax for companies with augmented profits between the lower and upper limits. You compute tax at the main rate of 25%, then deduct (upper limit – augmented profits) × 3/200 × taxable total profits ÷ augmented profits. This gives an effective rate between 19% and 25%.

How do associated companies affect the corporation tax limits?

The lower and upper limits are divided by the number of associated companies plus one. A company that is dormant throughout the period is generally not counted. The £1,500,000 instalment threshold is divided in the same way.

When does a company pay corporation tax by quarterly instalments?

When its taxable total profits are above the threshold of £1,500,000, adjusted for associated companies and short periods. For a large company, instalments fall in months 7, 10, 13 and 16 from the start of a 12-month period. Very large companies pay earlier, so check the question for the figures given.

How can corporation tax planning reduce or defer tax?

You can bring profits into a lower band by timing income and deductions, or avoid creating associated companies that cut the limits. You can also manage profit levels to stay under the instalment threshold. Always show the figures and the risks.