The 26.5% effective CT rate on landlord finance costs

For a limited-company landlord with taxable profits inside the £50,000–£250,000 marginal-relief band, the corporation-tax saving from a £1 finance-cost deduction is 26.5p, not 25p. Across that band, the effective marginal rate is higher than the headline 25% main rate — because every £1 of profit removed also shrinks the marginal-relief cushion at 1.5p per £1.

That is not a quirk of any individual lender's product or a transitional rule. It falls straight out of the published marginal-relief formula in Part 3A of the Corporation Tax Act 2010 and HMRC's standard fraction of 3/200 in force from 1 April 2023.

This piece walks the maths in two ways: (1) computed from first principles using the statutory formula, (2) cross-checked against HMRC's published marginal-relief calculator. Both produce the same answer. We then show what that means for a limited-company landlord with a typical early-repayment-charge deduction, an arrangement fee, or any other finance-cost line item that crosses the s272A border into the loan-relationships regime.

This is general information, not tax advice. Numbers are computed against the 2026-27 rate schedule as published by HMRC and verified against the GOV.UK calculator on 7 June 2026. Speak to a qualified accountant before acting on anything here.

The corporation-tax slabs in 2026-27

The £50k and £250k limits are divided by (1 + number of associated companies). A two-company group splits the band into £25k and £125k per company. The limits are also time-apportioned for short or long accounting periods.

"Augmented profits" means taxable total profits plus exempt distributions received from non-group companies (FII). For most single-company landlord structures with no equity stakes elsewhere, augmented profits and taxable profits are identical, which is the assumption used in every worked example below.

The marginal-relief formula

Section 19 of CTA 2010 defines marginal relief as:

MR = F × (U − A) × (N ÷ A)

Where:

• F is the standard fraction: 3/200 (i.e. 1.5%) from 1 April 2023
• U is the upper limit: £250,000 for a standalone company with no associates
• A is augmented profits
• N is taxable total profits

Corporation tax due is then the headline figure (25% × N) minus MR.

For a standalone company with no FII, A = N and the formula collapses to:

MR = 0.015 × (£250,000 − N)

That is a straight line. As N moves from £50,001 to £249,999, MR moves linearly from £3,000 down to £0.01. The CT due moves correspondingly.

Why the effective marginal rate is 26.5%, not 25%

For a standalone company with no FII, take the derivative of CT due with respect to N inside the marginal-relief band:

• Headline CT = 0.25 × N → derivative is +25p per extra £1
• Marginal relief = 0.015 × (250,000 − N) → derivative is −1.5p per extra £1
• CT due = headline − relief → derivative is 25p − (−1.5p) = 26.5p

In words: each extra £1 of profit not only attracts an extra 25p of headline tax, it also shaves 1.5p off the relief that was cushioning the rest of the profit. The two effects stack — and the combined marginal cost is 26.5p per £1, or 26.5% as an effective marginal rate.

It works the other way for deductions. Every £1 of allowable expense in the marginal-relief band reduces taxable profit by £1, cuts headline CT by 25p, and also increases marginal relief by 1.5p. Total CT saving: 26.5p per £1, or 26.5% as the effective marginal rate on the relieved slice.

Worked example: £8,000 ERC at £200,000 profit

Take a single-company landlord with a portfolio generating £200,000 of taxable profit (after all other expenses) before the finance-cost deduction we are testing. The landlord pays an £8,000 early-repayment charge in the year to switch a five-year fix. Under CTA 2009 Parts 5–6 loan relationships, the ERC is fully deductible in computing the loan-relationship debit, so taxable profit falls from £200,000 to £192,000.

Before deduction (taxable profit £200,000):

• Headline CT = 0.25 × £200,000 = £50,000
• Marginal relief = 0.015 × (£250,000 − £200,000) = £750
• CT due = £50,000 − £750 = £49,250
• Effective average rate = 24.625%

After deduction (taxable profit £192,000):

• Headline CT = 0.25 × £192,000 = £48,000
• Marginal relief = 0.015 × (£250,000 − £192,000) = £870
• CT due = £48,000 − £870 = £47,130
• Effective average rate = 24.547%

Tax saving from the £8,000 deduction = £49,250 − £47,130 = £2,120.

The naïve calculation at the 25% headline rate would put the saving at £8,000 × 25% = £2,000. The marginal-relief mechanic adds an extra £120 of relief — 1.5p of marginal-relief uplift per £1 of deduction, multiplied by £8,000.

Cross-checked against the GOV.UK calculator on 7 June 2026: enter £200,000 and £192,000 in turn (single company, no associated companies, 12-month accounting period to 31 March 2027) and the calculator returns £49,250 and £47,130. The £2,120 differential is the published HMRC arithmetic, not a model assumption.

Effective-rate curve across the £50k–£250k band

For a standalone company with no FII, the CT due and effective average rate at representative profit points:

The average rate climbs from 19% at the £50,000 boundary to 25% at the £250,000 boundary, but the marginal rate inside the band is a constant 26.5%. That is the rate that matters when sizing the tax effect of a single deductible item bumped against the curve.

What this means for limited-company landlord finance costs

A limited-company landlord typically incurs a cluster of finance-cost deductions in any remortgage year: ERCs, arrangement fees, broker fees, valuation fees, legal fees on the new facility, and the interest itself. All are deductible under the loan-relationships rules — most as debits in the year incurred, some amortised across the life of the loan.

If the company sits inside the marginal-relief band in that year, every £ of those deductions saves 26.5p in CT, not 25p. Put another way: the company's "headline" decision of whether to switch product, overpay, or extend the term needs to be priced against a marginal effective rate of 26.5%, not the 25% main rate quoted in most online guides.

The reverse also holds. Letting an avoidable expense bunch into a single marginal-relief year (rather than spreading it across two periods, where structurally legitimate) costs the company at 26.5% on the slice — not 25%. A landlord on the edge of the £250,000 upper limit who pushes a £20,000 deductible expense into next year (legitimately incurred then), where it sits squarely in the 25% main-rate slab, gives up £300 of marginal-relief uplift versus claiming it this year.

These are deduction-timing observations, not strategy. Whether the deduction is actually claimable in the period you'd like it to be is a matter of accruals accounting, GAAP, and statute — talk to a qualified accountant before acting.

Where the 26.5% rate breaks down

The 26.5% effective marginal rate assumes:

1. A standalone company with no FII. If the company has associated companies, the upper limit U falls and the relevant rate at any given profit level changes. The marginal effective rate inside the marginal band remains 26.5% — but the band itself is narrower.
2. No franked investment income. Dividend income from non-group companies counts in "augmented profits" A but not in taxable profits N. When A > N, the formula no longer collapses to the simple straight line, and the marginal rate on a £1 increase in N depends on whether A also moves.
3. A 12-month accounting period. Short or long periods time-apportion the limits, so a 6-month period sits inside the marginal band only between £25,000 and £125,000 of profit.
4. The standard fraction stays at 3/200. It has been 3/200 since 1 April 2023 and is set in s18 CTA 2010. Parliament can change it, in which case the 1.5p marginal-relief slope (and hence the 26.5% effective rate) moves with it.
5. Profit inside the £50k–£250k band. Below £50,000 the small-profits rate of 19% applies and there is no marginal relief to lose. Above £250,000 the main rate of 25% applies flat. The 26.5% rate is a feature of the marginal-relief slope only.

For companies sitting outside any of those five conditions, recompute against the actual U, A and N values from the corporation-tax return.

How this stacks with the cost stack

The 26.5% marginal rate is one slice of the limited-company landlord tax stack: corporation tax on rental profit, then dividend or salary extraction, then SDLT on any onward purchase. It interacts most visibly with finance costs (ERCs, arrangement fees, mortgage interest) because those are the deductions that can be timed across periods.

For the individual landlord caught by s272A ITTOIA 2005, the 26.5% rate is irrelevant — relief on finance costs is capped at a 20% basic-rate credit regardless of the landlord's marginal income-tax band. The corporation-tax marginal-relief mechanic only bites for companies, and only inside the £50k–£250k band.

For a landlord weighing corporate versus personal ownership, the 26.5% rate is the relevant cost of capital for finance-cost deductions on the corporate side. The personal side is fixed at the 20% credit. The cost-of-finance gap between the two ownership structures is therefore 6.5 percentage points at the £50k–£250k profit slab, not 5.0.

For the small minority of companies brushing the £250,000 associated-company threshold or the £500,000 quarterly-instalment threshold, the marginal-relief slope is the binding constraint on the lower threshold and the QIP-trigger is the binding constraint on the upper. Both are about the timing and rate at which CT is computed, not about whether expenses are deductible at all.

Anchoring against current rates

The April 2026 Bank of England 75% LTV five-year fixed quoted rate of 4.32% (BoE published file, 2026-04-01) sits inside the range of landlord remortgage rates from which ERCs are most often triggered. A landlord paying an £8,000 ERC at that rate to lock in a five-year fix has a £2,120 corporation-tax recovery inside the marginal band, against £6,170 of basic-rate-credit recovery (£1,543) under s272A if held personally. The 26.5p-vs-20p-per-£ relief gap on the same cash deduction is what the marginal-relief mechanic delivers.

That is a description of the published statute, not a recommendation to incorporate. The s162 incorporation-relief tests, SDLT consequences of transfer, and ongoing administrative cost are covered elsewhere — see the corporate-vs-personal cost stack for the full set of trade-offs and the cost-intelligence guides hub for the broader landlord-tax cluster.

To check current published mortgage rates at a sample postcode, try the Homecost postcode tool with LS1 5BD — Leeds city centre, an active landlord-corporate-ownership belt by Land Registry volume in the £180,000–£350,000 band (348,780 English & Welsh transactions in that price band in 2025, average sale £259,619).

The takeaway

The 25% headline corporation-tax rate quoted in most landlord-tax guides is right only for companies whose taxable profits sit at or above £250,000. Below £50,000, the rate is 19%. Between £50,000 and £250,000, the effective marginal rate on every £1 of profit added or removed is 26.5%, not 25% — a function of the 1.5% standard fraction baked into marginal relief by s18 and s19 CTA 2010.

For a landlord's finance-cost deductions — ERCs, arrangement fees, broker fees, interest — that 1.5-percentage-point gap is the difference between £2,000 and £2,120 of corporation-tax recovery on £8,000 of expense. It is not a margin worth ignoring, and the GOV.UK marginal-relief calculator will confirm the number in either direction.

This article is general information based on HMRC's published corporation-tax rates and the Corporation Tax Acts 2009 and 2010 as in force on 7 June 2026. It is not tax advice. Speak to a qualified accountant before acting on anything in it.