Associated Companies and Corporation Tax: The Rules

If you control more than one company, the Corporation Tax profit limits are shared between them, so each company can end up paying a higher rate on the same profit. The £50,000 and £250,000 limits that decide whether a company pays 19%, 25% or something in between are divided by the number of associated companies plus one. This guide explains what an associated company is, which companies count, how the limits are divided, and what to check before you set up or buy a second company.

Key takeaways

• Companies are associated if one controls the other or both are under the same control.
• The £50,000 and £250,000 limits are divided by the number of associated companies plus one.
• A company counts if it was associated at any time in the accounting period.
• Dormant companies are ignored. Overseas companies count.
• The same division applies to the £1.5 million threshold for paying by quarterly instalments.

What is an associated company?

For Corporation Tax, two companies are associated if one controls the other, or if both are under the control of the same person or persons. Control is broadly about who holds the majority of the shares, the votes, or the rights to income or assets. The companies do not have to be in a formal group, trade with each other or even operate in the same industry.

The simplest case is one individual who owns all the shares in two companies. Those two companies are associated. A holding company and its subsidiary are associated in the same way.

Why it matters: the rates and limits

Since 1 April 2023 the main rate of Corporation Tax is 25% for profits over £250,000. The small profits rate is 19% for profits of £50,000 or less. Between the two limits a company pays the main rate less marginal relief, which gives an effective rate that rises gradually from 19% towards 25%. The current figures are on GOV.UK under Corporation Tax rates, and we cover the basics in the small profits rate explained.

Those limits assume a single company with a 12 month accounting period. Where there are associated companies, each limit is divided by the number of associated companies plus one. The limits are also reduced proportionately for an accounting period shorter than 12 months. HMRC confirms both adjustments in its guidance on Marginal Relief for Corporation Tax.

How the limits are divided

The limits are split equally, whatever each company earns. If one of your two companies makes £5,000 and the other makes £120,000, each still has a lower limit of £25,000. The unused part of the smaller company's limit cannot be passed to the larger one.

Which companies count?

• Part-year association counts. A company is included if it was associated at any time in the accounting period, even for part of it.
• Dormant companies are ignored. A company that is not carrying on a trade or business in the period does not count. See dormant company accounts for what dormant means in practice.
• Overseas companies count. A company does not have to be UK resident to be associated.
• Size is irrelevant. A small side business run through its own company reduces the limits just as much as a large one.

Relatives, business partners and commercial interdependence

When deciding who controls a company, the rights of certain connected people can be added to your own. For companies owned by relatives or business partners, that attribution applies only where there is substantial commercial interdependence between the companies. In broad terms that means looking at how closely the two businesses are tied together in practice, rather than at the family relationship alone.

Two unrelated businesses owned separately by a married couple, run entirely independently of each other, are in a very different position from two companies that rely on each other to operate. The answer turns on the facts and can change from year to year, so take advice rather than assume. HMRC's detailed tests are in its Company Taxation Manual, linked from the Marginal Relief guidance above.

Quarterly instalment payments

Most small companies pay Corporation Tax in one amount after the year end, as explained in Corporation Tax payment deadline. Companies with profits over £1.5 million generally have to pay in quarterly instalments instead, and that £1.5 million threshold is divided by associated companies in the same way. A group of several companies can therefore reach the instalment regime at a much lower profit per company. There are exceptions, so check HMRC's guidance on paying Corporation Tax in instalments if you are anywhere near it.

Step by step: checking your position

1. List every company you control or hold a significant stake in, in the UK and abroad.
2. Add companies controlled by the same group of people who control yours.
3. Consider relatives and business partners. Ask whether there is substantial commercial interdependence with any company they control.
4. Remove any company that was dormant throughout the accounting period.
5. Check the whole period. Include any company that was associated for even part of it.
6. Divide the limits. Use the number of associated companies plus one, and reduce again for a short accounting period.
7. Compare profits with the divided limits to see which rate applies and whether marginal relief is due.
8. Enter the number on the return. The Company Tax Return asks for the number of associated companies. See the CT600 explained.

Worked example (illustrative)

"Hollin Electrical Ltd", an illustrative example, is owned entirely by one director. In June 2026 she sets up a second company, Hollin Property Services Ltd, which starts trading straight away. Both have 12 month accounting periods to 31 March 2027.

The second company was associated for only part of the period, but that is enough. Each company has one associated company, so the limits are divided by two: a lower limit of £25,000 and an upper limit of £125,000.

Hollin Electrical makes taxable profits of £130,000. On its own, that would fall between £50,000 and £250,000 and marginal relief would reduce the bill. With the divided limits, £130,000 is above the £125,000 upper limit, so the whole profit is taxed at the 25% main rate: £32,500. Hollin Property Services makes £18,000, which is under its £25,000 lower limit and is taxed at 19%: £3,420. The £7,000 of lower limit it did not use is simply lost.

The companies and figures are invented for illustration and are not a real client.

Common mistakes

• Leaving the box blank. Forgetting to declare associated companies understates the tax and can lead to interest and penalties.
• Counting only trading companies in the same sector. What the company does is not the test. Control is.
• Assuming a quiet company is dormant. A company receiving rent or investment income may be carrying on a business.
• Ignoring part-year associations. A company sold in the first month still counts for that period.
• Forgetting overseas companies. They count in the same way.
• Setting up a second company without running the numbers. There may be good commercial reasons to do it, but the tax effect on the first company should be known in advance. Our guide to marginal relief shows how the calculation works.

How we can help

We identify associated companies, work out the divided limits and any marginal relief, and prepare and file the Company Tax Return. Corporation Tax returns start from £250 per year on a fixed fee. See our Corporation Tax service, view our pricing, or contact us before you set up, buy or close a second company.