The Short Answer: Your Profit Thresholds Are Divided

If you own or control two or more limited companies, the associated companies rule reduces the profit bands that determine your corporation tax rate. For every company you associate with, the £50,000 small profits rate threshold and the £250,000 main rate threshold are divided by the total number of associated companies plus one (the company itself).

In plain English: one company gets the full thresholds. Two companies each get half. Three companies each get a third. And so on.

This matters because a company that would normally pay 19% on profits up to £50,000 might instead start paying 25% on profits above £25,000 (if there are two associated companies). The difference can be thousands of pounds each year.

As ICAEW qualified accountants, we see business owners trip over this rule regularly. It is one of the most common reasons a client's corporation tax bill comes out higher than they expected.

What Counts as an Associated Company?

HMRC defines an associated company as one where one company controls another, or where both companies are under common control. Control means holding more than 50% of the share capital, voting rights, or entitlement to assets on a winding up. It also covers control exercised by a person connected with the shareholder, such as a spouse, civil partner, or minor child.

The key points to watch are:

  • Spouses and civil partners: If you own 100% of Company A and your spouse owns 100% of Company B, the two companies are associated. HMRC treats you as connected persons, so control is aggregated.
  • Minor children: Shares held by a child under 18 are attributed to the parent for these purposes.
  • Joint control: If two unrelated directors each hold 50% of two companies, both companies are associated with each other.
  • Dormant companies: A dormant company generally does not count as an associated company, but only if it has been dormant throughout the entire accounting period. A company that traded for part of the year and then went dormant still counts.
  • Non-UK companies: Companies incorporated outside the UK count as associated if they are under common control. This catches many international groups.

There is an important carve-out for companies that are associated only because of a loan relationship or a fixed-rate preference share. Those do not count. But in practice, most trading companies caught by the rule will not benefit from this exception.

How the Thresholds Work in 2025/26

For the 2025/26 tax year, the corporation tax rates are:

  • Small profits rate: 19% on profits up to £50,000 (the lower limit).
  • Main rate: 25% on profits above £250,000 (the upper limit).
  • Marginal relief: Between £50,000 and £250,000, the effective rate gradually increases from 19% to 25%. The marginal relief fraction is 3/200.

If you have two associated companies, the lower limit becomes £25,000 (£50,000 divided by 2) and the upper limit becomes £125,000 (£250,000 divided by 2). With three companies, the limits become £16,667 and £83,333 respectively.

Here is a worked example. A husband and wife run a Birmingham café through Company A and a separate property management company through Company B. Both are 100% owned by the couple jointly. They are associated companies. Company A makes £40,000 profit in 2025/26. Company B makes £10,000 profit.

Without the associated companies rule, Company A would pay 19% on £40,000 (£7,600) and Company B would pay 19% on £10,000 (£1,900). Total: £9,500.

With the rule, each company has thresholds halved. Company A's lower limit is £25,000 and upper limit is £125,000. Its £40,000 profit falls within the marginal relief band. The corporation tax calculation is: 25% x £40,000 = £10,000, minus marginal relief of 3/200 x (£125,000 - £40,000) = £1,275. So Company A pays £8,725. Company B's £10,000 profit is below the £25,000 lower limit, so it pays 19%: £1,900. Total: £10,625.

The associated companies rule costs this couple an extra £1,125 in corporation tax. That is real money.

What Triggers a Review of Associated Companies?

You should review your associated company count whenever:

  • You incorporate a new company.
  • You acquire shares in another company (even a minority stake that gives you control).
  • A spouse, civil partner, or minor child incorporates or acquires a company.
  • You restructure your business group.
  • Your accountant prepares your year-end corporation tax return (CT600).

HMRC does not automatically know how many associated companies you have. You declare the number on the CT600 return. If you under-declare and HMRC later finds associated companies, they will reassess your tax bill and add interest and penalties. The rule is self-assessed, so accuracy matters.

We recommend keeping a simple spreadsheet listing all companies under common control, with the ownership percentages and accounting period dates. Update it whenever circumstances change.

Planning Options: Can You Avoid the Rule?

There are legitimate ways to structure your affairs so that associated companies do not apply, or the impact is reduced. But you must be careful. HMRC has anti-avoidance rules that catch artificial arrangements.

1. Check Whether Companies Are Truly Associated

The most common mistake is assuming two companies are associated when they are not. If you own 100% of Company A and your business partner (unrelated to you) owns 100% of Company B, and neither of you has any control over the other's company, they are not associated. The same applies if you own 51% of Company A and your brother owns 100% of Company B but has no involvement in Company A. Siblings are not connected persons for this purpose (unless there is a formal arrangement).

2. Keep Companies Genuinely Independent

If you have two companies that operate in completely different sectors, with separate management, separate bank accounts, and no cross-guarantees, HMRC is less likely to argue they are associated if the ownership structure is genuinely separate. But if the same two people control both, they are associated regardless of how independent they look.

3. Consider a Group Structure with Group Relief

If you have multiple companies that are already associated, you can sometimes use group relief to surrender losses from one company to another. This can reduce the overall tax bill. But it does not change the associated company count. You still face the reduced thresholds.

4. Wind Up or Dormant Unused Companies

If you have a company that is no longer trading, consider striking it off or making it dormant properly. A dormant company does not count as associated. But you must ensure it has been dormant throughout the entire accounting period of the other company. If it traded for even one day in the period, it counts.

5. Review Shareholdings with Connected Persons

If a spouse owns a separate company, consider whether it is genuinely needed. Sometimes the second company can be merged into the first, or the spouse can become a shareholder in the primary company instead. This eliminates the associated company issue. But be aware of settlement legislation (the "settlements" rules) if shares are gifted to a spouse who does not contribute actively to the business. HMRC can challenge dividend allocation in those cases.

What About Groups with More Than Two Companies?

The maths scales up quickly. A group of five companies each making £30,000 profit would have thresholds of £10,000 lower limit and £50,000 upper limit. Each company's £30,000 profit falls into the marginal relief band. The effective tax rate for each company would be around 23.5% instead of 19%. That is a 4.5 percentage point increase on £150,000 total profit, costing an extra £6,750.

At that point, it is worth considering whether the group structure is still the most tax-efficient arrangement. Sometimes a single company with separate divisions is simpler and cheaper, even if the operational benefits of separate companies are real.

When the Rule Does Not Apply

There are a few situations where the associated companies rule does not reduce your thresholds:

  • Dormant companies: As mentioned, a company dormant throughout the accounting period is ignored.
  • Companies associated only by a loan relationship: If the only connection is a loan between the companies, they are not associated.
  • Fixed-rate preference shares: If the only shares held are fixed-rate preference shares with no voting rights, those do not create an association.
  • Companies in administration or liquidation: These may be excluded in some cases, but specialist advice is needed.

Practical Steps for 2025/26

If you think the associated companies rule might apply to you, here is what to do:

  • List every company you control, directly or through connected persons (spouse, civil partner, minor children).
  • Check each company's accounting period end date. The thresholds are divided based on the number of associated companies at the end of the period.
  • Calculate your effective corporation tax rate using the divided thresholds. Use the marginal relief formula if your profit falls between the lower and upper limits.
  • If the rule is costing you significant tax, speak to your accountant about restructuring options before the next year-end.
  • Make sure your CT600 return declares the correct number of associated companies. Under-declaring is an easy way to trigger an HMRC enquiry.

For more on corporation tax planning, read our corporation tax guide or our director pay and dividends guide.

If you are unsure whether your companies are associated, or you want to check your current corporation tax position, get in touch with our team. We work with groups of all sizes across the UK, from Shoreditch startups to Manchester manufacturing groups.

Final Thought

The associated companies rule is a blunt instrument. It does not care whether your two companies are genuinely separate businesses or a single operation split for commercial reasons. If you control both, HMRC treats them as one for threshold purposes. The only way to avoid the sting is to understand the rule, plan your structure carefully, and declare correctly on your CT600.

If your group has more than one company, review your associated company count every year. It is a simple check that can save you thousands.