Corporation tax - marginal relief


R

Roger Underwood

After reading one or two worked examples on the 'net' of how marginal relief
on corporation tax works I must confess to be being somewhat baffled. Not
least because some of them are contradict each other and the IR.

My point of difficulty is what rate would a company with a profit of £30,000
in 2002-03 be charged for the £20,000 profits over the tax free £10,000
banding. From reading the rather unclear IR website I would guess it to be
somewhere between 0% and the small company rate of 19%, so my best guess
would be 14.25% (ie 19% less the 19/400 marginal relief fraction). However
the general consensus on the 'net' seems to be 23.75%.

Any help on this would be appreciated.

Roger
 
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R

Ronald Raygun

Roger said:
After reading one or two worked examples on the 'net' of how marginal
relief
on corporation tax works I must confess to be being somewhat baffled. Not
least because some of them are contradict each other and the IR.

My point of difficulty is what rate would a company with a profit of
£30,000 in 2002-03 be charged for the £20,000 profits over the tax free
£10,000
banding. From reading the rather unclear IR website I would guess it to
be somewhere between 0% and the small company rate of 19%, so my best
guess
would be 14.25% (ie 19% less the 19/400 marginal relief fraction).
Yes, that is wrong, and I agree that the IR info is not very clear.
However the general consensus on the 'net' seems to be 23.75%.
Correct. The way it works is that *if* the profit were £50k
or more, then you would pay 19% on the whole lot.

If profit is between £10k and £50k, then you *still* pay 19%
on the whole lot, but from that is then deducted marginal relief
of 19/400 of the amount by which your profit is short of £50k.

So at £30k, you pay 19% of £30k, which is £5700, minus 19/400
(i.e. 4.75%) of (£50k-£30k = £20k), which is £950. So in fact
you pay £4750 altogether, which works out at 23.75% of £20k.

The way the numbers have been designed to work is that the
tax payable increases linearly from zero at £10k to £9500 at
£50k. Since that band is £40k wide, the marginal tax rate,
i.e. the rate of tax levied on the excess over £10k, has to be
£9500/£40k, which is 23.75%.
 
R

Roger Underwood

Right, I've got it now. Thanks for your very helpful and clear explanation.

Best Wishes

Roger
 
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M

Mike Lewis

would be 14.25% (ie 19% less the 19/400 marginal relief fraction).
However
the general consensus on the 'net' seems to be 23.75%.
That is correct.
 

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