Tax Category Tax: calculations, VAT, self-employment tips and more

How to calculate marginal tax rate

The marginal tax rate is the rate of corporation tax paid by a company on profits greater than the threshold for the lower rate of tax but less than the threshold for the main rate. The lower and upper thresholds are £300,000 and £1.5 million respectively in 2013.

Companies with profits of less than £300,000 pay tax at the lower rate, which is also called the small profits or small companies rate. For the financial year 2013 the lower rate of corporation tax is 20 percent and the main rate is 23 percent.

Determine the financial year or years into which the company's accounting period falls. The 2013 financial year for corporation tax purposes runs from April 1 2013 to March 31 2014. If for example the company's accounting period runs from 1 January to 31 December 2013, 2012 rates will be applied to 25 percent of the company's profits and the remainder will be taxed at 2013 rates.

Multiply the upper threshold by the main tax rate. The formula for calculating the marginal rate is (upper threshold * main rate) - (lower threshold * lower rate) / (upper threshold - lower threshold). For 2013, multiply £1.5 million by 23 percent, which gives £345,000.

Multiply the lower threshold by the lower rate. For 2013 multiply £300,000 by 20 percent, to give £60,000.

Deduct tax due at the lower threshold from tax due at the upper threshold. In the example, deduct £60,000 from £345,000 to give £285,000 tax due in the marginal band.

Divide the tax due in the marginal band by the difference between the upper and lower thresholds. In the example, divide £285,000 by (£1.5 million - £300,000), which equals £285,000 / £1.2 million or 0.2375. Multiply the result by 100 to arrive at the marginal tax rate of 23.75% for 2013.

Calculate the total tax due on profits of less than the upper limit by multiplying the first £300,00 of profits by the lower rate and profits between the thresholds by the marginal rate. For example, if the company's total profits are £350,000 for 2013, tax due is (£300,000 * 20 percent) + (50,000 * 23.75 percent) or £60,000 + £11,875 which equals £71,875. If total profits are greater than the upper limit of £1.5 million, the full amount is taxed at the main rate of 23 percent.