This is a common source of confusion, so let me unpack it properly.
**The basic structure**
- Profits of £50,000 or less: 19% small profits rate.
- - Profits above £250,000: 25% main rate.
- - Profits between £50,000 and £250,000: you effectively pay a rate that tapers smoothly from 19% up toward 25%. That taper is marginal relief.
In plain terms: you don't pay 25% on everything and then get a cheque back. The company tax return works out your tax at 25% on all the profits, then deducts marginal relief to bring the bill down to the tapered amount. So you're effectively paying something in between — closer to 19% near the £50k end and closer to 25% near the £250k end.
A quick example at your £120k: tax at 25% would be £30,000, but marginal relief of £1,950 brings the actual bill down to £28,050 — an effective rate of about 23.4%. (The relief formula uses a fraction of 3/200 applied to the gap between your profits and £250,000; your accountant or tax software handles the arithmetic.)
**Do you need to claim it?**
Yes — and this catches people out. Marginal relief isn't automatic; it must be claimed in your company tax return (CT600). If you file yourself without claiming it, HMRC won't apply it on your behalf. Any decent corporation tax software calculates it for you, but check it's there before you submit.
**Watch out for associated companies**
The £50,000 and £250,000 thresholds are divided by the number of associated companies. So if your company has one associated company, the thresholds effectively become £25,000 and £125,000 — which would put your £120k very near the top of the taper. Also note that close investment-holding companies don't qualify for the small profits rate or marginal relief at all.
At £120k with no associated companies, just make sure the relief is claimed on the CT600 and you'll be paying the correct tapered amount.
