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ACCA Strategic Professional · Advanced Taxation (UK) · Alternative ways of achieving personal or business outcomes and their tax consequences

Kestrel Ltd has no associated companies, no dividend income and a 12-month year in the financial year 2025. Its taxable total profits before a proposed one-off bonus to its owner-manager are £150,000. The company is considering paying a £20,000 bonus, deductible for corporation tax. Ignoring employer national insurance, by how much would the bonus reduce the corporation tax liability, using the 2025 rates and marginal relief in the tax tables?

The saving is £5,300. Tax on £150,000 is £36,000 after marginal relief of £1,500, and tax on £130,000 is £30,700 after marginal relief of £1,800. The difference is 26.5% of the bonus, because profits fall within the marginal relief band and the effective rate exceeds 25%.

  1. A£5,300Correct
  2. B£5,000
  3. C£3,800
  4. D£6,500

Explanation

At £150,000: 25% × 150,000 = £37,500, less marginal relief (250,000 − 150,000) × 3/200 = £1,500, so tax is £36,000. At £130,000: £32,500 less (250,000 − 130,000) × 3/200 = £1,800, so tax is £30,700. The saving is £5,300, an effective 26.5% because marginal relief falls as profits fall. £5,000 ignores marginal relief.

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