What Are Associated Companies for Corporation Tax?
Associated companies are separate limited companies that are treated as a single group for corporation tax purposes. The rule exists to stop business owners from splitting a single trade across multiple companies purely to claim the 19% small profits rate on each one.
If your company has associated companies, the profit thresholds for the 19% rate and the marginal relief band are divided by the total number of associated companies plus one (your company itself). This can push your company into the 25% main rate much sooner than you might expect.
The rules are set out in CTA 2010, sections 25 to 30. They apply to accounting periods beginning on or after 1 April 2023, when the current corporation tax rate structure came into effect.
How the Profit Thresholds Work With Associated Companies
For a single company with no associates, the corporation tax bands for 2025/26 are:
- 19% small profits rate: profits up to £50,000
- Marginal relief band: profits between £50,001 and £250,000
- 25% main rate: profits above £250,000
If you have one associated company, you divide those thresholds by two (your company plus the associate). The bands become:
- 19% rate: profits up to £25,000
- Marginal relief: £25,001 to £125,000
- 25% rate: above £125,000
With two associated companies, divide by three. The 19% rate caps at £16,667, marginal relief runs to £83,333, and the 25% rate starts at £83,334.
This is not a tax on the group as a whole. Each company files its own corporation tax return (CT600) and pays tax on its own profits. But the rate each company pays depends on the combined profit position of all associated companies.
A Worked Example
Take a husband and wife who run two separate limited companies from their home in Birmingham. Company A is a building consultancy turning over £180,000 with profits of £60,000. Company B is a property management company turning over £95,000 with profits of £35,000.
The two companies are associated because the same individuals control both. The combined profits are £95,000. With two companies, the marginal relief band runs from £25,001 to £125,000. Both companies fall inside that band.
Company A pays corporation tax at an effective rate somewhere between 19% and 25%, calculated using the marginal relief formula. Company B does the same. The exact rate depends on the proportion of each company's profits relative to the total.
If the couple had structured the businesses as a single company, the combined profits of £95,000 would still fall inside the marginal relief band for a single company (£50,001 to £250,000). So the outcome would be broadly similar. But the point is that the associated company rules prevent them from claiming the full 19% rate on each company separately.
Which Companies Count as Associated?
The rules are wider than you might think. A company is associated with yours if one of the following applies:
- Common control: one person controls both companies
- Group control: the same group of persons controls both companies
- Associate control: a person who controls your company also controls another company, and that person's associates (family, business partners, trustees) hold shares in either company
Control means holding more than 50% of the share capital, voting rights, or entitlement to profits on a winding-up. It also includes the ability to secure that the company's affairs are conducted in accordance with the controller's wishes, which can catch situations involving director-shareholder agreements.
Dormant companies count as associated unless they have been dormant throughout the entire accounting period. A company that was dormant for part of the period but traded for the rest counts in full.
Non-UK resident companies also count if they would be associated under the same control tests. If you control a US LLC and a UK Ltd, they are associated for UK corporation tax purposes.
What Does Not Count?
There are some important exclusions:
- Companies under the control of a loan creditor (a bank holding a floating charge) are not associated through that creditor alone
- Companies held by a venture capital trust or certain institutional investors may be excluded
- Companies in administration or liquidation may not count if the administrator or liquidator has taken control away from the original shareholders
These exclusions are narrow. If you think one applies, check the legislation or ask your accountant. HMRC takes a broad view of association and will challenge artificial structures.
How Associated Companies Affect Marginal Relief Calculations
Marginal relief is the mechanism that phases in the 25% rate between the lower and upper limits. The formula reduces the corporation tax bill so that companies with profits in the marginal band pay an effective rate between 19% and 25%.
When associated companies exist, the lower limit and upper limit are both divided by the number of associated companies plus one. The marginal relief fraction also changes.
The standard marginal relief fraction for 2025/26 is 3/200 (1.5%). But when associated companies reduce the limits, the relief is calculated using the reduced upper limit. HMRC publishes the exact formula in the CT600 computation guide, but the practical effect is that each company's effective tax rate depends on its own profits relative to the reduced thresholds.
For most small groups, the key takeaway is this: if your combined profits across all associated companies exceed £50,000, you will pay more than 19% on at least some of your profits. The higher the combined profits, the closer you get to the full 25% rate.
Practical Implications for Business Owners
If you control more than one limited company, the associated company rules affect your tax planning in several ways.
Group structures. If you are setting up a new venture, consider whether it should sit inside an existing company or as a separate entity. A single company trading through separate divisions avoids the association problem entirely. But separate companies may still be preferable for liability reasons, particularly in property development, construction, or professional services where ring-fencing risk matters.
Spouse and family companies. A common structure involves one spouse running a trading company and the other running a property company. If they control both companies together, the companies are associated. The same applies if adult children hold shares in separate companies but the parents control all of them.
Partnerships with corporate partners. If you are a director of a company that is also a partner in a partnership, and that partnership controls another company, the association can flow through. This is complex and usually requires professional advice.
Disincorporation. If you have multiple companies that are no longer trading, consider striking them off or putting them into members' voluntary liquidation. A dormant company that stays on the register still counts as associated. If it has no assets and no liabilities, strike it off to remove it from the association count.
As ICAEW qualified accountants, we regularly see business owners who have accumulated several dormant companies over the years without realising the impact on their active company's corporation tax rate. A clean-up of the company register can save thousands in tax.
How to Calculate Your Effective Corporation Tax Rate
To work out your effective rate, you need to know:
- The number of associated companies (including yours) at the end of your accounting period
- Your company's own taxable profits for the period
- The total taxable profits of all associated companies for periods ending in the same 12-month window
If the combined profits are below the reduced lower limit, you pay 19%. If they are above the reduced upper limit, you pay 25% on all your profits. If they fall in between, you pay 19% plus marginal relief on the excess above the lower limit.
HMRC's corporation tax manual at CTM03700 contains the full marginal relief formula. For most businesses, the calculation is best handled by accounting software or a spreadsheet prepared by your accountant. Xero, FreeAgent, and Sage 50 all handle the calculation automatically if you enter the associated company details correctly.
If you are doing it manually, the formula for marginal relief is:
(Upper limit - profits) x (profits / total profits of all associates) x marginal relief fraction
This gives you the amount of relief to subtract from the 25% tax charge. The result is your actual corporation tax liability.
Common Mistakes and How to Avoid Them
Forgetting dormant companies. As mentioned, dormant companies count unless they have been dormant for the whole accounting period. If you struck off a company mid-year, it still counts for that year.
Ignoring overseas companies. A company you control in another country counts as associated. This catches many business owners who have a UK trading company and a Spanish property company or a US consulting entity.
Assuming partnership interests are separate. If you are a director of Company A and also a partner in a partnership that controls Company B, the association can apply through your combined control. Partnership structures need careful mapping.
Not updating HMRC. If the number of associated companies changes during the year, tell your accountant. The association count is determined at the end of the accounting period, but HMRC may ask for details of all associates at any point.
What to Do If You Have Associated Companies
First, list every limited company you control, alone or with others. Include companies you control through a trust, a partnership, or through family members who act on your instructions. Include dormant companies.
Second, check whether any of the exclusions apply. If a company is genuinely under the control of a liquidator or administrator, it may not count. If it has been dormant for a full accounting period, it does not count for that period.
Third, consider whether consolidation would be more efficient. If you run two separate trading companies that could operate as divisions of a single company, the tax saving from the 19% rate on the first £50,000 of combined profits may outweigh the administrative cost of merging them.
Fourth, if you decide to keep separate companies, plan your dividend and salary extraction to minimise the overall tax burden. The associated company rules affect corporation tax only. They do not affect your personal tax position, so you can still extract profits from each company in the most tax-efficient way.
If you need help mapping your group structure or calculating your effective corporation tax rate, contact our team. We deal with associated company calculations regularly and can run the numbers for your specific situation.
For more on corporation tax basics, see our corporation tax guide. If you are thinking about incorporating a new venture, our incorporation page covers the structure options.