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How to Maximise Your Marginal Relief in the UK

Accountant showing client how to maximise their marginal relief
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    Corporation Tax can be challenging to navigate, but with the right approach and understanding your business can benefit thanks to marginal relief. This is a form of tax relief that aims to help SME organisations.

    In this article, we’ll learn how to maximise your marginal relief in the UK. Contact WIS Accountancy to optimise your taxes and grow your business.

    What is Marginal Relief?

    Marginal relief for Corporation Tax is a mechanism designed to provide a smoother transition for businesses as they grow and their taxable profits move from the lower Corporation Tax small profits rate to the higher main rate. It’s a form of tax relief that aims to reduce the sudden increase in tax liability, making it an essential consideration for growing businesses.

    When a company’s taxable profits exceed the lower threshold for the small profits rate but are below the upper limit for the main rate, marginal relief is applied to reduce the amount of tax the company has to pay. This system ensures that businesses do not face a sudden and steep increase in their tax liabilities as their profits grow, providing a more gradual transition into higher tax brackets.

    How Does Marginal Tax Relief Work?

    This relief applies to companies with profits that fall within the marginal relief threshold, which is set between the small profits rate and the main rate.

    When a company’s profits fall into this bracket, they’re not immediately subject to the higher main rate. Instead, marginal relief is applied to reduce the tax rate effectively, ensuring that the increase in tax liability is gradual rather than abrupt.

    As of 2024, marginal relief is set at 19 % for taxable profits that fall below £50,000 – known as the small profit rate. For taxable profits in excess of £250,000, the main rate of 25 % will apply. Marginal relief offers a gradual increase in Corporation Tax when you fall between these two rates.

    How is Corporation Tax Marginal Relief Calculated?

    The calculation of marginal relief can be somewhat intricate, involving specific formulas that take into account the company’s profits, the standard main rate, and the small profits rate.

    The general principle is that the relief decreases the effective tax rate on profits within the marginal band, ensuring that businesses are not penalised for their growth.

    The exact calculation will depend on the current tax rates and thresholds set by the UK government, which can vary from year to year.

    Using the financial year of 2023 as an example, the marginal relief fraction was 3/200. This does change over time, so it’s best to use an online calculator like this one from the UK government.

    This will allow you to calculate marginal relief on Corporation Tax profits.

    Strategies to Maximise Marginal Relief

    Understanding how marginal relief works is one thing, but effectively maximising it requires strategic planning and a comprehensive understanding of allowable expenses and profit allocation.

    Thankfully, there are a few ways that you can go about this, so let’s take a look at a few powerful strategies to help maximise your marginal relief:

    Maximising Allowable Expenses

    One of the most straightforward methods to maximise marginal relief is through diligent management and maximisation of allowable expenses.

    By accurately reporting all legitimate business expenses, a company can reduce its taxable profit, potentially bringing it within the marginal relief threshold.

    This includes everything from operational costs, employee salaries, and office supplies, to more significant expenses like business equipment and property.

    Keeping detailed records and understanding what qualifies as an allowable expense is key for this strategy to be effective.

    Profit Planning

    Strategic profit planning can also play a significant role in maximising marginal relief. This involves careful management of income and expenses to control the company’s profit levels effectively.

    For instance, if a company anticipates a significant profit that would exceed the marginal relief threshold, it might consider accelerating certain expenses or deferring income to the next financial year.

    Similarly, investment decisions can be timed to manage the company’s taxable profits, keeping them within the marginal relief range.

    Need More Advice on Corporate Taxes? Get in Touch with WIS Accountancy

    Navigating the complexities of corporate taxes, including marginal relief, requires expertise and strategic planning. WIS Accountancy specialises in offering comprehensive tax advice and strategies tailored to your business’s unique needs and goals.

    Our team of tax experts is here to help you understand and maximise your tax relief opportunities, ensuring that your business thrives while maintaining compliance with UK tax regulations.

    Contact us today at WIS Accountancy to learn how we can assist in optimising your tax position and supporting the growth and success of your business.

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