Corporation Tax: Associated companies and corporation tax: examples

From 1 April 2023 companies with taxable profits over £250,000 will pay corporation tax at the main rate of 25%.  Companies with taxable profits of £50,000 or less will be subject to corporation tax at the rate of 19% and companies with profit levels between £50,000 and £250,000 will pay tax at 25%, reduced by marginal relief.

Marginal relief is given by reducing the charge to corporation tax (25%) by the following:

(U-A) x N/A x F

F = Standard marginal relief fraction (3/200)

U = Upper limit (£250,000)

A = Augmented profits

N = Taxable total profits

Augmented profits are ‘taxable total profits’ and any exempt distributions received from companies that are not 51% subsidiaries or held through a consortium.

For an accounting period of less than 12 months the lower limit and the upper limit are proportionately reduced.

Example 1
For a company with profits of £200,000 and no associated companies, the marginal relief calculation is as follows:

Tax due at 25%                                              £200,000 x 25% = £50,000

Less: Marginal relief ((U-A) x N/A x F)           (250,000 – 200,000) x 3/200 = (£750)

Tax due                                                           £49,250

If the company is ‘associated’ with one or more other companies in relation to an accounting period, then s18D (3) CTA 2010 provides that:

a)    the lower limit of £50,000 is divided by (1+N)

b)    the upper limit of £250,000 is divided by (1+N)

… where N is the number of those associated companies.

So, for a company with two associated companies the lower limit is £16,667 (£50,000/3) and the upper limit is £83,333 (£250,000/3).

For an accounting period of less than 12 months the lower limit and the upper limit are proportionately reduced.

For a company with no associated companies and with an accounting period of nine months the lower limit will be £37,500 (£50,000 x 9/12) and the upper limit will be £187,500 (£250,000 x 9/12).

For a company with one associated company and an accounting period of nine months the lower limit will be £18,750 (£50,000 x ½ x 9/12) and the upper limit will be £93,750 (£250,000 x ½ x 9/12).

The apportionment of profits for accounting periods less than 12 months, or where the accounting period straddles two fiscal years, is calculated by reference to the number of days in each period as shown in the example below.

Example 2
A company with no associated companies has taxable profits of £150,000 for the year ended 31 December 2024 and received exempt distributions in the year of £25,000, therefore its augmented profits are £175,000. As the augmented profits fall between the lower and upper limits, corporation tax is calculated with marginal relief as follows.

Effective marginal tax rate in the marginal relief band
Each additional £1 of profit in the marginal rate band (between augmented profits of £50,000 and £250,000) is taxed at an effective marginal rate of 26.5% for financial year 2023 as illustrated in the table below.

As augmented profits rise by £200,000, additional corporation tax of £53,000 arises and the marginal rate is therefore 26.5%.

As augmented profits rise by £200,000, additional corporation tax of £53,000 arises and the marginal rate is therefore 26.5%.