SPOTLIGHT ON: Associated company rules
Protecting your corporation tax thresholds
Running more than one limited company is common for many owner-managed businesses.
You might have a trading company alongside a property company, a separate company for a different service line, a holding company sitting above the group, or perhaps an older company that's been retained for a particular brand or project.
Each company may make perfect commercial sense on its own.
The important point is that, for corporation tax purposes, HMRC may look at those companies together.
Since 1 April 2023, the UK has operated a tiered corporation tax system. The thresholds that determine whether a company pays the 19% small profits rate, the 25% main rate, or falls into the marginal relief band between the two can be divided between associated companies.
The more associated companies there are, the lower those thresholds become for each company.
This guide explains how the rules apply for accounting periods falling within the corporation tax financial year beginning 1 April 2026, who counts as an associated company, and the practical steps you can take to protect your position.
Corporation tax rates
For the financial year beginning 1 April 2026, the corporation tax rates remain:
- 19% small profits rate for companies with profits up to £50,000
- 25% main rate for companies with profits over £250,000
- Marginal relief for profits between £50,000 and £250,000
The Government's Corporate Tax Roadmap has also confirmed its intention to keep the headline corporation tax rate capped at 25% throughout this Parliament, while retaining the current small profits rate and marginal relief thresholds.
One point that's often overlooked is how marginal relief works.
Companies within the marginal relief band are first charged corporation tax at 25%, before marginal relief is deducted using the standard 3/200 fraction. In practice, profits within this band can face an effective marginal corporation tax rate of 26.5%.
That's why it's important to monitor profit levels carefully. The associated company rules can bring a business into the marginal relief band much sooner than many directors expect.
What is an associated company?
The rules are based on control.
A company is associated with another if:
- One company controls the other, or
- Both companies are controlled by the same person or group of people.
For accounting periods beginning on or after 1 April 2023, the corporation tax thresholds are divided by the total number of associated companies, including the company itself.
It's also worth remembering that a company can count as associated even if that relationship only exists for part of the accounting period. This often catches people out when companies are formed, sold, struck off or reorganised during the year.
For a 12-month accounting period, a standalone company has the full £50,000 lower limit and £250,000 upper limit available.
If there are two associated companies, those limits reduce to £25,000 and £125,000 for each company.
With three associated companies, they reduce further to approximately £16,667 and £83,333.
With four associated companies, the limits become £12,500 and £62,500, while five associated companies reduce them again to £10,000 and £50,000.
For example, a standalone company making £40,000 of taxable profit would normally expect to pay corporation tax at 19%.
If it has three associated companies, however, its thresholds reduce to £12,500 and £62,500, meaning that same £40,000 profit could fall into the marginal relief band.
Control is wider than many people realise
Control isn't limited to share ownership.
It can also include voting rights, entitlement to income or assets on a winding up, and rights held indirectly.
The rules can also take account of a person's associates, including:
- A spouse or civil partner
- Parents, grandparents and other lineal ancestors
- Children, grandchildren and other lineal descendants
- Brothers and sisters
- Business partners
- Certain trustees and personal representatives
That doesn't automatically mean every family-owned company becomes associated.
Where companies are controlled by associates, HMRC will consider whether there is substantial commercial interdependence between them.
For example, a husband and wife may each own separate businesses in completely different sectors. Those businesses would not usually be associated simply because they are married.
However, that position may change if they share customers, staff, premises, funding, equipment or management.
What is substantial commercial interdependence?
HMRC looks at three broad areas.
Financial interdependence
This may exist where one company financially supports another, or where both have a financial interest in the same business.
Examples include:
- Inter-company loans
- Guarantees
- Shared funding
- Informal financial support
Economic interdependence
This looks at whether companies work towards the same commercial objectives.
Shared customers, regular referrals or businesses that rely on each other commercially may all indicate economic interdependence.
Organisational interdependence
Companies may also be linked through shared:
- Management
- Employees
- Premises
- Equipment
- Administrative support
- Systems
Not every connection has to exist.
A strong link in just one area may be enough, depending on the circumstances.
Companies that often catch people out
Some of the most common situations include:
- Old companies retained for future projects or brand names.
- Property companies renting premises to a trading company.
- Family companies providing loans, equipment or referrals.
- Separate companies owned by spouses but sharing staff or administration.
- Investment companies that appear dormant but still receive investment income.
It's also important to distinguish between being dormant at Companies House and being dormant for corporation tax purposes. The two aren't necessarily the same.
Similarly, while some passive holding companies can be ignored under specific rules, the conditions are narrow and shouldn't be assumed to apply without checking.
Quarterly instalment payments
Associated companies don't just affect corporation tax rates.
They can also affect when corporation tax has to be paid.
A company is normally regarded as large if annual taxable profits exceed £1.5 million but do not exceed £20 million.
However, from 1 April 2023, that £1.5 million threshold is also divided by the number of associated companies.
For example, where there are three associated companies in total, the threshold reduces to £500,000.
That can have significant cashflow implications.
Large companies generally pay corporation tax in four instalments throughout the accounting period:
- Six months and 13 days after the start of the accounting period.
- Three months after the first instalment.
- Three months after the second instalment.
- Three months and 14 days after the end of the accounting period.
Very large companies, with profits above £20 million (again adjusted for associated companies), pay even earlier.
Although exceptions do exist, including where corporation tax is below £10,000 or certain first-year provisions apply, these rules should always be reviewed before payment dates are assumed.
Practical steps
If you operate more than one company, it's worth reviewing your structure regularly.
Good practice includes:
- Reviewing all connected companies each year.
- Checking whether older companies are still needed.
- Keeping transactions between companies on commercial terms.
- Separating premises, staff, systems and customers wherever possible.
- Planning profits across the group.
- Documenting where businesses genuinely operate independently.
Final thoughts
The associated company rules can affect both how much corporation tax you pay and when you have to pay it.
If you run multiple companies, have family members with their own businesses, or are thinking about setting up another company, it's worth reviewing the position before your next year end.
A straightforward review can identify which companies count, whether any exclusions apply, and whether you're approaching the marginal relief band or quarterly instalment payment thresholds.
If you'd like to review your associated company position before your next year end, I'm always happy to have a conversation.
