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ACCA Strategic Professional · Advanced Taxation (UK) · Corporation tax: the scope of corporation tax, including close companies and investment companies

Kestrel Ltd has taxable total profits of £400,000 for the year to 31 March 2026 (financial year 2025), including £150,000 of property income, and has one 51% subsidiary that was trading throughout the year. It has no dividends received. What is the correct treatment of the profit limits for marginal relief?

Associated companies divide both limits by one plus the number of associates. With one 51% subsidiary, the limits become £25,000 and £125,000. Profits of £400,000 exceed the upper limit, so all profits are taxed at 25%, giving £100,000, with no marginal relief.

  1. ALimits are unchanged at £50,000 and £250,000 because only the parent's profits count
  2. BLimits are halved to £25,000 and £125,000, so profits exceed the upper limit and the main rate of 25% applies to all profitsCorrect
  3. CLimits are divided by 3 to £16,667 and £83,333
  4. DThe lower limit is halved but the upper limit stays at £250,000

Explanation

Limits are divided by one plus the number of associated companies. With one associated company, the divisor is 2, giving £25,000 and £125,000. Profits of £400,000 exceed £125,000, so no small profits rate or marginal relief applies and tax is 25% × £400,000 = £100,000. Leaving limits unchanged would wrongly give relief.

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