The headline corporation tax SME UK rate is 25%. The rate you actually pay — on the profit that actually flows out to you — can be dramatically lower once marginal relief, capital allowances, R&D claims, and director remuneration planning are applied properly. A £400,000-profit SME with poor planning pays roughly £100,000 in corporation tax. The same business with proper planning can legally pay under £70,000. The difference is a well-timed year-end review.
The Three-Tier Corporation Tax SME UK Structure Most Directors Get Wrong
Corporation tax has been a tiered system since 1 April 2023. There is no single rate for all SMEs — the rate depends on your profit level, and there is a sliding scale between the two bands called marginal relief. Full rates and fractions are on the gov.uk corporation tax rates page.
| Annual Profit | Effective Rate | How It’s Calculated |
|---|---|---|
| Up to £50,000 | 19% (small profits rate) | Flat 19% on all taxable profit |
| £50,001 – £250,000 | Marginal rate (up to 26.5%) | 25% minus marginal relief; effective rate rises gradually to 25% |
| Over £250,000 | 25% (main rate) | Flat 25% on all taxable profit |
The marginal band is where most SMEs sit — and where calculation errors are most common. The marginal relief fraction for 2026/27 is 3/200. A company with £120,000 of taxable profit does not pay 19% on £50,000 and 25% on £70,000. It pays 25% on the full £120,000, then subtracts marginal relief of (£250,000 – £120,000) × 3/200 = £1,950. The effective rate on £120,000 profit is therefore approximately 23.4%.
Marginal Relief Worked Example
For a limited company with £180,000 of taxable profit in the year to 31 March 2027:
- Step 1: calculate tax at the main 25% rate — £180,000 × 25% = £45,000
- Step 2: calculate marginal relief — (£250,000 – £180,000) × 3/200 = £1,050
- Step 3: corporation tax due — £45,000 – £1,050 = £43,950
- Effective rate on £180,000 profit — 24.42%
The same exercise at £75,000 of profit: £75,000 × 25% = £18,750; minus marginal relief of (£250,000 – £75,000) × 3/200 = £2,625; corporation tax due £16,125; effective rate 21.5%. Every pound of profit pushed out of the marginal band — by timing, by allowable expense, or by pension contribution — delivers real-rate tax savings, not headline-rate savings.
Associated Companies — The Threshold Trap
The £50,000 and £250,000 thresholds are divided by the number of associated companies. If you own two trading companies, each has thresholds of £25,000 and £125,000 — meaning both hit the 25% main rate far earlier. Associated companies are broadly those under common control by the same person or group. Spouses’ companies are included if they work together in the business. This catches many husband-and-wife structures that assumed each company had its own full bandwidth.
Dormant companies, passive investment companies, and companies held through a non-trading parent are assessed differently, but the default rule is inclusion. If you operate multiple companies, a structural review is the single highest-impact planning step available.
R&D Tax Relief — Higher Bar, Higher Scrutiny
R&D relief was restructured from 1 April 2024 into the merged RDEC scheme, which replaces the previous SME and large company schemes for most claimants. The rate is 20% (expressed as a taxable above-the-line credit, which nets to roughly 15% after tax). Loss-making R&D-intensive SMEs (where R&D spend is 30%+ of total expenditure) get an enhanced credit at 27%. The effective relief is real money — an R&D spend of £100,000 can generate a £15,000 credit for most SMEs, or £27,000 for R&D-intensives.
But HMRC has tightened the bar sharply. In 2026, HMRC flagged 17–20% of all R&D claims for enquiry. The R&D Anti-Abuse Unit requires detailed project-level evidence of technical uncertainty and the competent professional’s judgment. The 6-month pre-notification rule — which most SMEs still miss — requires first-time claimants (or any claimant with a three-year gap) to notify HMRC within six months of the accounting period end, before filing the actual claim. Miss this and the entire claim is invalid.
Capital Allowances — Full Expensing and AIA
Capital allowances remain one of the most underused reliefs by SMEs. Two mechanisms matter:
- Annual Investment Allowance (AIA): up to £1,000,000 per year of qualifying plant and machinery expenditure, 100% deductible against taxable profit in the year of acquisition
- Full expensing: from 1 April 2023 onwards, companies can deduct 100% of qualifying main-pool plant and machinery with no upper limit (50% for special-rate assets), provided the asset is new and the company is not leasing it out
For most SMEs, AIA at £1,000,000 is more than generous enough to cover annual capital spend. Full expensing matters when capital spend exceeds the AIA cap or where timing requires relief certainty. Combined use — AIA first, full expensing on the overflow — optimises both reliefs. A company buying £1,200,000 of qualifying equipment gets full immediate relief on the whole lot, generating a £300,000 tax reduction at the 25% main rate.
Dividend Allowance and Director Remuneration
The dividend allowance dropped from £2,000 to £1,000 in 2023/24, and from £1,000 to £500 from 2024/25. It remains at £500 for 2026/27. Dividend tax rates themselves rose by 2 percentage points on 6 April 2026 under the Autumn Budget 2025 legislation — ordinary rate 10.75% (was 8.75%), upper rate 35.75% (was 33.75%), with the additional rate unchanged at 39.35%. This has shifted the optimum director remuneration structure materially. For a director-shareholder taking £50,000 of total income:
- Salary of £5,000 (at the secondary NIC threshold) avoids employer NICs
- Remaining £45,000 as dividends — £500 tax-free, then 10.75% basic rate, 35.75% higher rate (2026/27 rates, up 2 percentage points from April 2026)
- The total tax and NIC bill is typically £7,000–£8,000 lower than taking everything as salary
- Further tax-efficient routes include pension contributions (deductible against corporation tax), tax-free trivial benefits (£50 per benefit, up to £300 per director per year), and the £175 staff entertaining allowance
Pension contributions deserve special attention: a £40,000 employer pension contribution reduces corporation tax by up to £10,000, avoids all NICs, and is not a taxable benefit to the director provided it is within the annual allowance (£60,000 for most taxpayers, tapering for very high earners). It is the single most tax-efficient route to move company profit into the director’s personal wealth.
Common Mistakes
- Calculating corporation tax as two separate bands — applying 19% to the first £50,000 and 25% to the rest — which produces the wrong answer and overstates the liability in the marginal zone
- Missing the 6-month R&D pre-notification deadline, which invalidates the entire claim regardless of its technical merit
- Not claiming Annual Investment Allowance on smaller equipment purchases because the amounts feel too small — every qualifying £1,000 of equipment is worth up to £250 of corporation tax relief
- Keeping profit in the company when a pension contribution would extract it tax-efficiently — particularly for directors approaching retirement
- Forgetting associated company rules when structuring group arrangements — the thresholds halve or thirds depending on structure
Key Takeaways
- Calculate your effective corporation tax rate, not the headline rate — the difference determines real planning value
- Review your position before year-end, not after — most reliefs require action before the accounting period closes
- Pre-notify any first-time or restarting R&D claim within 6 months of the accounting period end
- Use full expensing and AIA together for large capital spends
- Model salary-vs-dividend-vs-pension annually as the dividend allowance and NIC thresholds continue to shift
Next Steps for Your Business
Our year-end corporation tax planning session runs in the three months before your year-end. We model the marginal rate impact of your current trajectory, test R&D eligibility, review capital allowance claims, and structure director remuneration for the next tax year. For most SMEs, the session delivers identifiable tax savings multiple times its cost.
Frequently Asked Questions
What is the corporation tax rate for small businesses in 2026/27?
Corporation tax in 2026/27 runs 19% on profits up to £50,000, 25% on profits above £250,000, and a marginal rate in between that slides gradually from 19% to 25%. The marginal relief fraction is 3/200. The effective rate for a company with £120,000 of profit is around 23.4%. These bands and fractions have been unchanged since 1 April 2023.
How does marginal relief actually work?
Calculate tax at the main 25% rate, then subtract marginal relief. Marginal relief equals (£250,000 – your taxable profit) × 3/200, provided your profit is between £50,000 and £250,000. For profits of £100,000, marginal relief is (£250,000 – £100,000) × 3/200 = £2,250. Tax due is (£100,000 × 25%) – £2,250 = £22,750. The effective rate is 22.75%.
What is the 6-month rule for R&D tax relief?
From 1 April 2023, first-time R&D claimants — and claimants who have not made a claim in the previous three years — must notify HMRC of their intention to claim within six months of the end of the accounting period to which the claim relates. Miss this deadline and the entire R&D claim is invalid regardless of technical merit. The notification is a simple online form but is easy to overlook.
Should I take salary or dividends as a director?
For most director-shareholders in 2026/27, the optimum structure is a salary of around £5,000 (at the secondary NIC threshold, avoiding employer NICs) plus dividends for the rest. Dividends attract tax at 10.75% in the basic rate band and 35.75% in the higher rate band from 6 April 2026 (up from 8.75% and 33.75% in 2025/26), with a £500 dividend allowance. The additional rate remains 39.35%. The 2 percentage point rise narrows the gap between salary and dividend extraction — pension contributions from the company are now often more efficient still. Individual circumstances including mortgage plans, pension capacity, and spousal income affect the right mix.
What is full expensing and how does it differ from AIA?
The Annual Investment Allowance (AIA) is a £1,000,000-per-year cap giving 100% first-year relief on most plant and machinery. Full expensing, introduced in April 2023, gives unlimited 100% first-year relief on new main-pool plant and machinery bought by companies — with no cap but stricter conditions (must be new, not leased out, limited to companies). Most SMEs use AIA first and full expensing on the overflow above £1,000,000.
How do associated companies affect my corporation tax SME UK rate?
If your company has associated companies — broadly, companies under common control — the £50,000 small profits threshold and £250,000 main rate threshold are divided by the number of associated companies plus one. Two associated companies halve both thresholds. This can push companies into the main 25% rate at surprisingly low profit levels. Group structure reviews are one of the highest-impact planning steps for businesses operating more than one company.
