How does the corporation tax associated companies rule affect UK small profits rate eligibility?

Full answer

From April 2023, the UK corporation tax system reintroduced a two-rate structure: 19% (small profits rate, for profits up to GBP 50,000) and 25% (main rate, for profits above GBP 250,000), with marginal relief between GBP 50,000 and GBP 250,000. However, the associated companies rule significantly affects how these thresholds apply in practice. How the associated companies rule works The GBP 50,000 lower limit and GBP 250,000 upper limit are divided equally among associated companies -- defined as companies under common control (directly or indirectly 51% or more). Formula: Adjusted threshold = Standard threshold / (1 + number of associates) Examples: -- 0 associates: thresholds are GBP 50k / GBP 250k (standard) -- 1 associate: thresholds are GBP 25k / GBP 125k -- 2 associates: thresholds are GBP 16,667 / GBP 83,333 -- 3 associates: thresholds are GBP 12,500 / GBP 62,500 -- 4 associates: thresholds are GBP 10,000 / GBP 50,000 A business owner with three associated companies (e.g., a trading company, a property investment company, and a holding company) has an effective small profits threshold of only GBP 12,500. A company making GBP 50,000 profit in this group would face the 25% main rate, not 19%. What counts as an associated company? Two companies are associated if one controls the other or both are controlled by the same person or persons. Control is defined as owning more than 50% of share capital, or possessing more than 50% of voting power. Companies controlled by connected persons (spouses, civil partners, relatives, and business partners) may be associated even without shared ownership. Dormant companies A dormant company that has never traded or received income does not count as an associated company for threshold purposes -- but only if it has always been dormant. Overseas associates Overseas subsidiaries and affiliates count as associated companies for this purpose, so international structures can also trigger threshold division. Marginal relief Between the adjusted lower and upper limits, marginal relief applies: the effective rate graduates smoothly from 19% to 25%. The marginal relief calculation is: (upper limit - augmented profits) / augmented profits x 3/200 x augmented profits. Planning Business owners with multiple companies should review their structures annually. Consolidating dormant or holding companies, or restructuring ownership to remove association, may restore access to the lower thresholds and generate meaningful tax savings.

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