Marginal Relief bridges the gap between paying Corporation Tax at the ‘small profits rate’, and the main rate. Businesses are eligible to claim Marginal Relief on profits falling between £300,000 and £1.5m.
What is Marginal Relief?
The system exists to ensure that there is a gradual increase in the Corporation Tax paid by companies between the upper threshold of the ‘small profits rate’ (which is currently 20% on profits up to £300,000), and the main rate (currently 21% on profits of £1.5m or more).
See the table below (courtesy of GOV.UK):
Until March 2010, Marginal Relief was known as ‘Marginal Small Companies’ Relief’ (MSCR).
The relief can be claimed by any companies which generate annual profits which fall between the two thresholds, although different rules apply if your company has associated companies, or was a close investment-holding company at the end of the last CT period.
How is Marginal Relief calculated?
The fundamental steps to follow when calculating Marginal Relief are as follows:
1. Work out your company’s taxable profits
2. Calculate the main rate of Corporation Tax due on these profits
3. Subtract your company’s taxable profits from the lower main rate of Corporation Tax threshold (£1.5m)
4. Multiply this sum by the ‘standard fraction’ (currently 1/400 for the 2014/15 tax year).
5. Subtract the amount in step 4 from the amount in step 2.
You will need to perform a more complex calculation if Corporation Tax rates change, or of your company has associated companies, for example.
How can you claim Marginal Relief?
Your accountant will enter your Marginal Relief calculation on your company’s annual Corporation Tax return, which must now be submitted online in the vast majority of cases. You must now also settle your outstanding Corporation Tax liabilities electronically.
The system itself is well known for causing confusion amongst business owners (and accountants!). Fortunately HMRC provides a useful online calculator for this very purpose. Make sure you have your taxable profit figures to hand, and your company’s accounting date.
You can also see a number of examples of how the relief is calculated here.