Corporation tax

The band in the middle costs more than the top

Between £50,000 and £250,000 of profit, the marginal rate of UK corporation tax is 26.5%. That is higher than the 25% paid by a company earning five million.

This is not an interpretation. HMRC states the figure in its own manual: £53,000 of extra tax across the £200,000 between the limits, which is 26.5%.

It is called marginal relief, so directors reasonably assume the band is a discount zone somewhere between 19% and 25%. On the average rate it is: at £100,000 of profit the effective rate is about 22.75%. But no decision turns on an average rate. Decisions turn on what the next pound costs, and inside this band the next pound costs 26.5p.

It is a hump, not a step

The rate goes 19% up to £50,000, 26.5% between the limits, then back down to 25% above £250,000. Describing it as "26.5% once you pass £50,000" is wrong, because it falls again. The reason is simply that relief is being withdrawn as profits rise, and once it is gone there is nothing left to withdraw.

Which inverts every year-end lever

A director's pension contribution, bringing capital expenditure forward, deferring an invoice into the next period: each of these is worth 26.5p in the pound to a company in this band and only 25p to a much larger one. The company with £80,000 of profit gets a better return on a pension contribution than the company with £8 million.

The formula, and why a banded calculation gives the wrong number

Corporation tax is not banded like income tax. You do not charge 19% on the first slice and 25% on the rest. You charge the whole of taxable total profits at the main rate and then subtract marginal relief:

relief = F × (U − A) × (N ÷ A)

F is the standard fraction of 3/200, U is the upper limit, A is augmented profits and N is taxable total profits.

Calculators that band it produce a plausible-looking number that is wrong by hundreds of pounds, and because it lands between 19% and 25% it does not look wrong.

A and N are different inputs

Augmented profits are taxable total profits plus exempt distributions from outside the group. Those dividends are not taxed, but they are used to decide where you sit in the taper.

So dividend income you pay no corporation tax on can cut your marginal relief and raise the tax on your trading profit. Dividends from a 51% subsidiary, from a parent of which you are a 51% subsidiary, or from a quasi-subsidiary are excluded and do not inflate the figure. Only outside dividends do.

Associated companies, and the off-by-one that costs the most

Associated companies divide both limits by the number of associates plus one. Three associated companies means dividing by four, giving a £12,500 lower limit and a £62,500 upper limit. That is HMRC's own worked example, and dividing by three instead of four is where this calculation most often goes wrong.

Three things about association catch people out:

• Counted worldwide. An overseas company under the same control divides your limits even though it pays no UK corporation tax.
• No group needed. Two unrelated trading companies owned by the same person are associated.
• Any part of the period counts. Selling a subsidiary in month two still means it counts for the whole period, and two companies associated in different non-overlapping parts of the same period both count.

Working the other way, dormant companies are ignored entirely, as are genuinely passive holding companies. Counting a dormant company overstates the divisor and produces a bill that is too high.

The same associate count also divides the £1.5 million quarterly instalments threshold, so a group of six companies reaches instalments at £250,000 of profit each rather than £1.5 million. That is a cashflow surprise rather than a tax one, and it arrives without warning.

Who gets nothing at all

A close investment-holding company gets neither the small profits rate nor marginal relief, and pays the full main rate from the first pound. A company that exists only to hold investments generally falls into this, which regularly surprises people who set one up expecting 19%.

Marginal relief also requires UK residence in the accounting period, so a non-resident company trading through a UK permanent establishment does not qualify. And ring fence oil and gas profits use a different set of numbers entirely: 19% and 30% with an 11/400 fraction.

The same idea in four markets, built four different ways

All four of these markets have the idea of a lower rate for smaller companies. All four build it differently, and the differences are structural rather than a matter of degree, so the four headline percentages cannot be lined up and compared.

The cleanest way to see it is to ask what each system actually looks at to decide your rate.The UK and Canada test the profit. Australia tests the company. The United States does not test.

Australia decides by the company, and ignores the profit entirely

An Australian company pays 25% if it is a base rate entity and 30% if it is not, on the whole of its taxable income. Base rate entity means aggregated turnover under $50 million and no more than 80% of assessable income being passive income, and both limbs have to hold. A listed investment company well under the turnover threshold still pays 30% because all of its income is passive.

Notice that neither limb mentions profit. So Australia has no small-profit relief of any kind: a one-person company with $20,000 of profit is taxed at exactly the same percentage as a company turning over $49 million. On the same $60,000 of profit that is 25% in Australia and about 12% in Ontario, and the gap is not because Australian rates are high, it is because Australia is not measuring the same thing.

Passive income is a longer list than most people count. It is corporate distributions and their franking credits, royalties and rent, most interest, gains on qualifying securities, net capital gains, and any partnership or trust amount traceable to one of those. That last limb is the one that catches people: rent earned by a trust and distributed to your company counts as passive in your hands, even though your company never let a property to anybody.

And the test is run twice, on different years. What you pay is decided by the current income year. What you may frank a dividend at is decided by the previous one. Both statements are on the same ATO page, so a company can correctly pay tax at 25% and frank at 30%. If you are working out what a distribution is worth to a shareholder, that is the number that matters, and our dividend tax page shows why: the franking credit is computed from the company rate, so the wrong rate produces the wrong credit.

Canada slices, and three provinces slice somewhere else

Canada is the only one of the four that does what people assume all of them do: a genuine two-band slice. 9% federally on active business income up to the business limit and 15% above it, with a provincial lower and higher rate on top of each.

Those federal figures are the end of a subtraction rather than rates in their own right, which is worth knowing because it explains why they are such odd numbers. The basic rate of Part I tax is 38%, the federal abatement takes it to 28%, and the general reduction takes it to 15%. The small business deduction takes it to 9% instead.

The trap is the business limit. Everybody quotes $500,000, and federally that is right. Provincially it is not always: Nova Scotia uses $700,000, and Prince Edward Island and Saskatchewan use $600,000. Where the two limits differ there is a middle band charged at the federal general rate and the provincial lower rate simultaneously, and no published combined rate describes it.

A Nova Scotia company with $600,000 of active business income pays $60,000 federally and $9,000 provincially, so $69,000 in total, an effective 11.5%. Apply the widely published 10.5% combined small business rate and you get $63,000, which is $6,000 short. Assume the provincial limit follows the federal one and you get $81,500, which is $12,500 too much. The published rate is wrong in both directions depending on which way you guess.

Quebec and Alberta are absent from the calculator above for a real reason rather than an oversight: they have no corporation tax collection agreement with the CRA and administer their own, so the CRA's own rate table excludes them too.

The United States has no small company rate, and its second rate is a floor

A flat 21%. IRS Publication 542 puts it as multiplying taxable income by 21%, and there is nothing else to work out: no brackets, no threshold, no relief, and the same percentage on a $40,000 profit as on a $40 million one. Before 2018 there was a graduated structure, and a good deal of writing about US corporate tax still assumes one.

The United States does have a second rate, and it is the mirror image of everybody else's. The other three markets bend the rate down at the bottom as relief for the small. America bends it up at the top: a 15% corporate alternative minimum tax on adjusted financial statement income, for corporations averaging over a billion dollars of it. Same instrument, pointed the opposite way.

State corporate income tax is real, runs from nothing to roughly twelve per cent, and is deliberately not worked out here. There is no single official source that publishes all fifty, and they move on fifty separate legislative calendars. A table one person cannot keep right is worse than no table, so the calculator gives you the federal figure and says plainly that it is not the whole bill. Canada gets its provincial table on this page for the opposite reason: the CRA publishes every province on one page with a date against every change.

Australia has a marginal relief hump too, and it is 55%

One genuine parallel is worth drawing, because it shows the British 26.5% band is a type of thing rather than a British oddity. An Australian not-for-profit company pays nothing on the first $416 of taxable income, then 55% of the excess, until that catches the flat company rate on the whole amount.

That is the same machinery as marginal relief: a benefit clawed back as profits rise, producing a marginal rate well above the headline rate. The ATO publishes the shade-in limit as $762 for a 25% company, and it is not an arbitrary figure, it is simply where 55% of the excess over $416 catches 25% of the whole. The difference is scale. The UK runs its hump over £200,000 of profit at 26.5%. Australia runs its over about $346 at 55%.

Why one calculator cannot just switch a rate

A country switch that changed a percentage would give the wrong answer in three of these four markets, because the percentage is not the part that differs. The question differs. The UK needs to know how many associated companies you have, because that divides both limits. Canada needs to know which province and whether the income is active business income of a private corporation. Australia needs to know your turnover and your passive income share, and does not care about your profit at all. The United States needs nothing beyond the profit itself.

Four different questions, and none of the four is asked by the other three. That is why the form above changes shape rather than just changing a symbol, and it is the main reason a rate table with four columns is close to useless for anybody filing a return.