Corporation Tax on £120,000 Profit Explained
A comprehensive guide to UK Corporation Tax on £120,000 of taxable profit, explaining the marginal relief calculation, the 23.375% effective rate, and HMRC filing deadlines.
On a taxable profit of £120,000, you pay exactly £28,050 in Corporation Tax. This liability arises because your profits fall within the marginal relief tax bracket. HM Revenue and Customs applies the 25% main rate and then deducts relief.
Key takeaways: Corporation Tax on £120,000
- Your total Corporation Tax bill on £120,000 of taxable profit is £28,050.
- The business is subject to an effective tax rate of 23.375% rather than a flat rate.
- The calculation falls under marginal relief rules because the profits sit between £50,000 and £250,000.
How much Corporation Tax is due on £120,000 profit?
A company earning £120,000 in taxable profit faces a net Corporation Tax liability of £28,050 after subtracting £1,950 in marginal relief.
The calculation begins by applying the 25% main rate to the total taxable profits, which initially yields £30,000. HM Revenue and Customs then permits a reduction using the marginal relief fraction of 3/200, lowering your actual payment under provisions established in the Finance Act 2023.
| Calculation Step | Amount |
|---|---|
| Taxable Total Profits | £120,000 |
| Tax at Main Rate (25%) | £30,000 |
| Less Marginal Relief (3/200 × [£250,000 − £120,000]) | -£1,950 |
| Corporation Tax Payable | £28,050 |
| Effective Tax Rate | 23.375% |
How do the UK Corporation Tax rate bands work?
UK Corporation Tax operates on a sliding scale with a 19% Small Profits Rate, a 25% Main Rate, and a marginal relief zone.
Under current UK tax law, the lower 19% rate applies to companies with profits below £50,000. Profit exceeding £250,000 is taxed at the 25% main rate. Companies with profits between these limits qualify for marginal relief to smooth the transition.
| Taxable Profit Bracket | Applicable Corporation Tax Rate |
|---|---|
| Up to £50,000 | 19% (Small Profits Rate) |
| £50,001 to £250,000 | Marginal Relief applies (Graduated Rate) |
| Over £250,000 | 25% (Main Rate) |
What is Marginal Relief and how is it calculated?
Marginal relief is a UK tax mechanism that gradually increases the effective rate of Corporation Tax from 19% to 25% for companies with taxable profits between £50,000 and £0250,000. It prevents a sharp tax cliff-edge by applying a standard mathematical fraction of 3/200 to reduce the main tax rate liability.
The standard formula to determine this deduction requires multiplying the difference between the upper limit and your profits by the standard fraction. Under simple corporate structures with no auxiliary income, this is calculated as: 3/200 multiplied by the result of £250,000 minus your taxable profits.
Why is my effective marginal tax rate 26.5%?
The 26.5% effective marginal rate is a mathematical quirk that taxes every additional pound of profit within the middle band higher than the headline rate.
Within the £50,001 to £250,000 tax band, the gradual withdrawal of marginal relief means that each extra pound of profit incurs 25% tax plus a 1.5% reduction in relief. This creates an effective marginal tax rate of 26.5% on incremental profits. Knowing this helps UK companies time their business investments and assess dividend strategies effectively.
What reduces your Corporation Tax thresholds?
Your company's limits for the 19% small profits rate and 25% main rate are reduced by associated companies, short periods, and augmented profits.
The standard £50,000 and £250,000 thresholds are not static. Certain corporate scenarios require these limits to be adjusted downwards under UK tax legislation, specifically:
- Associated companies: The limits are divided equally among all companies under common corporate control, meaning one associated company halves your thresholds to £25,000 and £125,000.
- Short accounting periods: If your company's accounting period is less than the standard 12 months, the limits must be reduced proportionally.
- Augmented profits: Incorporating non-group exempt dividends increases your augmented profit total, which limits eligibility for relief via a complex adjustments formula.
When must you pay and file your Corporation Tax?
UK companies must pay their Corporation Tax bill within nine months and one day, while the tax return must be filed within twelve months.
For example, if your company's accounting period ends on 31 December, your tax payment is due to HM Revenue and Customs by 1 October of the following year. Your central filing obligation is the CT600 return, which must be submitted online exactly 12 months after your period end.
Will I pay 19% or 25% Corporation Tax if my profit is exactly £120,000?
You pay neither flat rate. HM Revenue and Customs applies marginal relief to your profits, resulting in a blended effective rate of 23.375% and a total tax liability of £28,050.
How does the associated companies rule affect my marginal tax relief?
This rule divides your tax thresholds equally among all associated firms. If you have one associated company, your upper limit falls to £125,000, bringing you closer to the peak 25% rate.
What are augmented profits in Corporation Tax?
Augmented profits comprise your total taxable profits plus any exempt dividends received from non-group companies, used specifically to dictate your eligibility thresholds for marginal relief.
Is my Corporation Tax marginal relief rate different for short accounting periods?
The relief fraction of 3/200 remains stable, but the lower £50,000 and upper £250,000 thresholds are reduced proportionally to match the lower number of days in your active short accounting period.