Associated Companies — How They Cut Your Corporation Tax Thresholds (2026)

A Quick Recap on Corporation Tax Rates

Before April 2023 every company paid a flat 19% Corporation Tax rate. That changed. There are now effectively three bands, set by reference to your company's taxable profit:

• Small profits rate (19%): applies where profits are at or below the lower limit of £50,000.
• Marginal relief: applies where profits fall between the lower limit of £50,000 and the upper limit of £250,000. The main rate of 25% is reduced by marginal relief, which produces an effective marginal rate of 26.5% on the slice of profit between the two limits.
• Main rate (25%): applies in full where profits exceed the upper limit of £250,000.

That 26.5% marginal rate often surprises directors — it is higher than the 25% headline figure because it is the effective rate on profits in the marginal band. The key point for this article is that the £50,000 and £250,000 limits are not fixed. They shrink when you have associated companies.

How Associated Companies Divide the Limits

The £50,000 and £250,000 limits are divided by the total number of associated companies — that is, the company in question plus any other companies associated with it. Put simply, you divide by "the number of associates plus one".

• No associated companies: limits stay at £50,000 and £250,000.
• One other associated company (two in total): limits halve to £25,000 and £125,000.
• Two other associated companies (three in total): limits become £16,667 and £83,333.
• Three other associated companies (four in total): limits become £12,500 and £62,500.

The effect is that a company can be pushed into marginal relief — or even the full 25% rate — at a much lower profit than you might expect. A trading company making £45,000 profit would normally pay the 19% small profits rate. But if it has one associated company, the lower limit drops to £25,000, so a chunk of that profit now falls into the marginal band at 26.5%. The same profit, more tax, simply because a second company exists.

What Makes Two Companies "Associated"?

Broadly, a company is associated with another company if, at any time in the accounting period (or the preceding 12 months), one of the following applies:

• One company controls the other; or
• Both companies are under the control of the same person, or the same group of persons.

"Control" usually means holding more than 50% of the share capital, more than 50% of the voting power, or rights to more than 50% of the income or assets on a winding up. If the same person or group meets any of those tests in two companies, the companies are associated — and each company's thresholds are reduced accordingly.

The substantial commercial interdependence test

This is where it catches people out. When deciding whether companies are under the control of the same group of persons, HMRC can attribute to you the rights and powers of your "associates" — which includes relatives such as a spouse, civil partner, parent, child, or business partner. However, those associate rights are only brought into account if there is substantial commercial interdependence between the two companies.

HMRC looks at three types of interdependence:

• Financial interdependence: one company financially supports the other, or both have a common financial interest in the same concern.
• Economic interdependence: the companies have the same economic objective, the activities of one benefit the other, or they share customers.
• Organisational interdependence: the companies share management, employees, premises or equipment.

If two companies are genuinely separate — different customers, separate premises, separate finances, no shared staff — the interdependence test may not be met, and a relative's company is not automatically counted. But the closer the operational links, the more likely the companies will be treated as associated.

Worldwide Companies Count

The rules count associated companies wherever they are resident — not just UK companies. If you control a company overseas, or are part of a group that does, it can still reduce your UK thresholds. This matters for directors who have set up an overseas entity or inherited a stake in a foreign company. Non-UK-resident companies are included in the count even though they do not themselves pay UK Corporation Tax.

Which Companies Are Ignored?

Not every company you control counts. Two important exclusions apply:

• Dormant companies: a company that is not carrying on a trade or business at any point in the accounting period is generally ignored. This is the most common exclusion in practice — a non-trading shell or a company you set up to protect a name but never traded through is usually not counted.
• Certain passive holding companies: a holding company can be excluded where it meets specific conditions — broadly, it has no assets other than shares in its 51% subsidiaries, no income other than dividends from those subsidiaries (which it passes on in full), and no chargeable gains or management expenses. These are tight conditions, so do not assume a holding company is automatically passive.

The key word for the dormant exclusion is "trade or business". Holding an investment can amount to carrying on a business even where there is no active trade — so a company that merely holds an investment property and collects rent is generally not dormant for these purposes. Do not rely on a company being ignored just because it feels inactive.

Trade-Relevant Examples

Example 1 — Trading company plus a property company

A plumber runs his trade through Smith Plumbing Ltd and has set up Smith Property Ltd to hold a couple of buy-to-let flats. He owns 100% of both. The property company collects rent — that is carrying on a business, so it is not dormant. The two companies are under his control, so they are associated. His trading company's limits halve: the lower limit drops from £50,000 to £25,000. Profits above £25,000 now attract marginal relief at 26.5% rather than 19%.

Example 2 — Husband and wife, separate trade companies

A husband runs an electrical company and his wife runs a separate decorating company. Each owns 100% of their own company. Because they are relatives (associates), their rights can in principle be attributed to each other — but only if there is substantial commercial interdependence. If the two businesses share an office, vehicles, a bookkeeper and refer work to each other, they are likely to be associated. If they are run entirely separately with no shared resources or customers, they may not be. The outcome turns on the facts.

Example 3 — Buying a dormant shelf company

A builder buys a ready-made shelf company to reserve a brand name for a future venture. As long as it never trades and carries on no business, it stays dormant and is ignored for the associated companies count. The moment it starts trading — or starts holding income-producing assets — it becomes a live associated company and begins eating into his thresholds.

It Also Affects Quarterly Instalment Payments

The thresholds that decide whether a company must pay Corporation Tax by quarterly instalments — rather than nine months and one day after the year end — are also divided by the number of associated companies. The "large" company threshold (broadly £1.5 million of profit) and the "very large" threshold (broadly £20 million) are split in the same way. So associated companies can not only raise your tax rate but also accelerate when you have to pay it, which is a cash-flow consideration for growing trade businesses.

A Note on the History

If you have been in business a while, you may remember associated companies rules from before 2015. Those older rules were repealed when Corporation Tax was unified at a single rate. The current rules — reintroduced from 1 April 2023 alongside the small profits rate and marginal relief — replaced the simpler "51% group companies" test that applied in the intervening years. So the concept is back, but the detail differs from the pre-2015 version. Advice or assumptions based on the old rules may be out of date.

Planning Points for Trade Directors

• Don't create associated companies by accident. Setting up a second company for a side venture, a property, or a name reservation can quietly halve your trading company's thresholds. Weigh that tax cost before you incorporate.
• Ask whether a second company is worth it. The administrative cost plus the threshold reduction can outweigh the benefit. Sometimes a single company with separate trading divisions, or a sole trader / partnership structure, is cheaper overall.
• Keep genuinely separate companies genuinely independent. Where you and a relative each run a company, avoid shared premises, shared staff, shared finance and cross-referrals if you want to argue there is no substantial commercial interdependence.
• Keep dormant companies truly dormant. A company that carries on no trade or business is ignored. The moment it starts holding income-producing assets or trading, it counts.
• Watch overseas entities. Worldwide companies count, so a foreign company you control reduces your UK thresholds too.
• Time your profits. If you are close to a divided lower limit, pension contributions or other deductible expenditure may keep profits in the 19% band.

Quick Reference: Divided Thresholds 2026

Figures are for 2026 and can change in future Budgets. The associated companies rules are detailed and fact-dependent — particularly the interdependence test — so speak to a qualified accountant before restructuring or incorporating a second company.