Marginal relief means that tax rate grows gradually as the company's profits grow up, to the main corporate tax threshold. Marginal relief is available to companies making profits between £300,000 and £1.5 million, when the CT full rate of 28 per cent applies. Basically, marginal relief is a way of saying that if you make profits of £300,001, this profit is a long way short of the £1.5 million threshold, so a formula is applied to reduce the rate of tax.
On profits between £300,000 and £1.5 million, the rate gently scales up from the small company rate to the main rate of CT. Marginal relief is given where profits fall between the lower and upper limits. Where a company is 'associated' with other active trading companies during the relevant accounting period, or the accounting period is less than 12 months, the relevant limits are reduced an a pro-rata basis.
Calculation of marginal relief
Statutory formula To establish the amount of marginal relief by which tax liability is to be reduced, the following statutory formula must be applied:
- (M-P)x(1/P)x Statutory Fraction
- M- Higher relevant maximum amount
- P- Total profits including non-group dividends
- I- Profits excluding non-group dividends
Statutory Fraction= 3/400(these fractions are set each year by the Finance Act). The figure resulting from application of the statutory formula should then be deducted from the figure resulting from the application of the main rate to the company's profits, to provide the amount of corporation tax payable. Turning to changes in the fraction with which marginal relief is calculated, this is yet another change for small businesses to cope with. The FSB does not have off-the-shelf data about members profits. This is often quite difficult data to obtain as members are reluctant to divulge what is seen as confidential information. Given the window in which to prepare for this inquiry, we were unable to carry out a survey to obtain this information. However, we do have robust data on sales turnover and have used this to test the changes to marginal relief. Just over 10 per cent of the FSB's members have sales turnover of between £500,000 and £1 million, therefore this band are most likely to qualify for marginal relief on profits once costs are taken into account.
Calculation of marginal relief where profits include dividends
Where a company's profits include dividends from another company the situation is more complex. These dividends are not actually taxable in the hands of the recipient company but do have an impact on taxable profits because they must be included in the company's profits total to determine the extent to which a company may benefit from marginal relief. This is why the statutory formula shown above makes a distinction between profits including and not including non-group dividends. The basic effect of the statutory formula is that the higher the proportion of total profits which is made up of dividends, the less marginal relief there is available for the actual profits taxed .
Examples of Marginal relief
- Marginal relief is available for companies making profits between £300,000 and £1.5 million. For profits between these thresholds, the rate of Corporation Tax reduces gradually. In this case, the rate of Corporation Tax is reduced by 1% for every £1,000 of profit.
- For example, a company that makes a profit of £400,000 would pay a Corporation Tax rate of 24%. This rate is 4% lower than the standard 28% rate, as the company has benefited from £4,000 of marginal relief.
- Another example is a company that makes a profit of £1,200,000. This company would be entitled to £24,000 of marginal relief, and would pay a Corporation Tax rate of 23%.
- Marginal relief can also be applied to certain capital allowances. For example, a company that makes a profit of £600,000 would be entitled to £12,000 of marginal relief on its capital allowances. This would reduce the rate of Corporation Tax from 28% to 26%.
Advantages of Marginal relief
Marginal relief can be advantageous for companies, as it provides a measure of flexibility in their tax payments. This is especially true for companies that make profits between £300,000 and £1.5 million. The advantages of marginal relief include:
- Reduced tax burden: Marginal relief reduces the amount a company pays in corporate tax, providing a measure of financial flexibility. This can be beneficial for companies that are just over the threshold, as they can pay a lower rate of tax than if they were over the threshold.
- Lower rates of taxation: Marginal relief also means that companies making profits between £300,000 and £1.5 million pay a lower rate of tax than if they were over the threshold. This can be beneficial for companies that are just starting out, as they can pay lower rates of tax and reinvest the savings in their business.
- Less paperwork: Marginal relief also reduces the amount of paperwork companies have to do, as the calculations for marginal relief are simpler than calculating the full rate of tax. This can save time and money, allowing companies to focus on other aspects of their business.
Limitations of Marginal relief
Marginal relief is a useful tool for companies looking to reduce their tax liability, however, there are certain limitations associated with it. These include:
- It is only available to companies making profits between £300,000 and £1.5 million. This means that companies making more than the threshold amount are not eligible for the relief.
- The relief does not apply to all types of income, such as capital gains and dividends.
- Marginal relief is only available for corporation tax, not other taxes such as income tax or VAT.
- The relief is only applicable to profits made in the current financial year and cannot be used to reduce tax liabilities from previous years.
- The amount of relief available is limited, and in some cases, the amount of relief may not be enough to make a significant difference to a company's overall tax liability.
- A graduated rate structure: This approach allows companies to pay a lower tax rate on the first portion of their profits and a higher rate on their remaining profits.
- Deferral of tax payments: Companies can delay paying taxes on their profits until the profits are fully realised. This allows them to use their funds more effectively.
- Tax holidays: Companies can be granted a tax holiday, where they do not have to pay any taxes on their profits for a certain period of time.
- Tax incentives: Companies may be offered financial incentives to help them increase their profitability. This can include deductions for research and development costs, tax credits for investing in certain projects, or other tax deductions.
- Tax credits: Companies can claim tax credits for certain expenses, such as training or research and development. This can help them reduce their tax bills.
In summary, there are several approaches to marginal relief, such as graduated rate structures, deferral of tax payments, tax holidays, tax incentives, and tax credits. Each of these approaches can help companies reduce their tax bills and improve their profitability.
- Steve Sims 2011, p.130
- Peter Rayney 2013, p.92
- J. Scott Slorach, Jason G. Ellis 2013, p.188
- Great Britain: Parliament: House of Lords: Select Committee on Economic Affairs 2007, p.93
- J. Scott Slorach, Jason G. Ellis 2013, p.188
- Rayney P., (2013). Tax Planning for Family and Owner-Managed Companies , A&C Black, Haywards Heath.
- Sims S., (2011). Understanding and Paying Less Property Tax For Dummies , John Wiley & Sons, Chichester.
- Slorach J.S., Ellis J.G., (2013). Business Law , OUP Oxford, Oxford.
- The Finance Bill 2007: 4th report of session , (2007), The Stationery Office, Londyn.
Author: Dominika Grzyb