Corporation Tax is the tax your limited company pays on its taxable profits. Understanding the rate structure helps you plan your salary, dividends, and pension contributions to minimise your overall tax bill.
Current rates (2025/26)
The Corporation Tax rate depends on your company's taxable profits. Profits up to £50,000 are taxed at the small profits rate of 19 percent. Profits above £250,000 are taxed at the main rate of 25 percent. Profits between £50,000 and £250,000 fall into the marginal relief band, where the effective rate gradually increases from 19 percent to 25 percent.
The marginal relief trap
For contractors with profits in the marginal relief band (£50,000–£250,000), the effective marginal tax rate on each additional pound of profit is 26.5 percent, which is actually higher than the main rate of 25 percent. This quirk of the marginal relief calculation means that keeping your profits just below £50,000 through pension contributions or other legitimate planning can be particularly tax-efficient.
Practical implications for contractors
A contractor billing £100,000 per year with £12,570 salary and £6,000 expenses has taxable company profits of approximately £81,430. This falls within the marginal relief band, resulting in a Corporation Tax bill of approximately £18,500, an effective rate of around 22.7 percent. By making a £32,000 pension contribution, the contractor could reduce taxable profits to approximately £49,430, bringing the entire amount into the small profits rate at 19 percent, saving over £3,000 in Corporation Tax.
Planning ahead
Work with your accountant to forecast your annual profits and plan your salary, pension contributions, and dividend timing accordingly. The end of each financial year is an opportunity to make adjustments that optimise your tax position for the year just completed.