Associated Companies and Corporation Tax: How They Split Your Profit Limits

Corporation Tax Rates in 2026/27

From April 2023, the UK corporation tax system returned to a two-rate structure. For accounting periods in 2026/27:

• 19% small profits rate applies where augmented profits are at or below GBP50,000
• 25% main rate applies where augmented profits exceed GBP250,000
• Marginal relief applies where profits fall between GBP50,000 and GBP250,000, with an effective marginal rate of approximately 26.5% in that band

This structure replaced the flat 19% rate that applied from 2017 to 2023. The return of the marginal relief band -- and associated companies rules that interact with it -- has significant planning implications for businesses with multiple connected companies.

The Associated Companies Rules

The profit limits (GBP50,000 and GBP250,000) are not fixed for all companies. They must be divided by the number of associated companies plus one.

Example with no associates: A standalone company has its profits limit at GBP50,000 (19% rate) and GBP250,000 (25% rate).

Example with one associated company: Two associated companies each have limits of GBP25,000 and GBP125,000.

Example with two associated companies: Three associated companies each have limits of GBP16,667 and GBP83,333.

This means a group of three associated companies will face the 25% rate once any individual company's profits exceed GBP83,333 -- rather than GBP250,000 for a standalone company.

The practical effect is that for businesses structured as multiple companies (holding company plus subsidiaries, or parallel trading companies), the corporation tax advantage of the 19% rate is compressed significantly.

What Makes Companies Associated?

The associated companies rules are found in sections 18E to 18S of the Corporation Tax Act 2010.

Basic Test: Control

Two companies are associated if one controls the other, or if both are under the common control of the same person or persons.

Control for corporation tax purposes means:

• Owning more than 50% of the ordinary share capital, OR
• Being entitled to more than 50% of income on distribution, OR
• Being entitled to more than 50% of assets on a winding-up, OR
• Exercising, or having the right to exercise, a dominant influence over the company

Common control arises where the same individual (or group of individuals acting together) controls two or more companies.

Example: Alison owns 100% of Company A and 80% of Company B. Both companies are associated because she controls both. Company A and Company B must split the profit limits between them.

Attribution Through Associates

The rules look through to associates of shareholders when determining control. Associates include:

• Spouse or civil partner
• Parents and grandparents
• Children and grandchildren
• Siblings

If Alison owns 100% of Company A and her husband Ben owns 100% of Company B, are they associated? Not automatically -- but if Alison's shareholding in Company A is aggregated with Ben's (as her associate), and together they control Company B... the question depends on whether the substantial commercial interdependence test applies.

Substantial Commercial Interdependence

From April 2023, the attribution of an associate's shareholding applies only where there is substantial commercial interdependence between the two companies. This test prevents unrelated family businesses from being deemed associated merely because the owners are relatives.

HMRC considers substantial commercial interdependence to exist where there is:

Financial interdependence: One company gives financial support to the other, or each has a financial interest in the other's activities (e.g., loans between the companies, profit-sharing arrangements, or one company guaranteeing the other's debts).

Economic interdependence: The companies pursue the same economic objective, or the activities of one benefit the other, or they share customers or markets in a non-arm's-length way.

Organisational interdependence: The companies share common management, employees, premises, or equipment.

Where none of these factors exists -- where two siblings each run genuinely separate, unrelated businesses -- their companies should not be associated through the sibling relationship alone.

However, where associated-owned companies share an accountant, operate from the same premises, have overlapping directors, or transact with each other regularly, HMRC may well determine that substantial commercial interdependence exists.

Dormant Companies and Passive Companies

Not all companies in a group count for associated company purposes. Dormant companies (those that have had no significant accounting transactions during the period) are excluded from the count.

A holding company that does nothing other than hold shares in subsidiaries may also be excluded from the count in certain circumstances, though this is more nuanced and depends on whether the holding company itself has augmented profits.

Augmented Profits

The profit limits are tested against augmented profits, not simply taxable profits. Augmented profits include:

• Taxable profits for the accounting period
• Plus franked investment income (dividends received from non-associated UK companies)
• But excluding dividends from associated companies (to avoid counting the same income twice across a group)

This means that a company receiving substantial dividends from non-group UK companies may have higher augmented profits than its taxable profits suggest, potentially pushing it into the marginal relief band or the 25% rate.

Marginal Relief Calculation

Where a company's augmented profits fall between the reduced lower limit and the reduced upper limit (after dividing by associated companies), it pays tax under the marginal relief formula:

Tax = (Augmented profits x 25%) -- (Marginal Relief Fraction x (Upper Limit -- Augmented Profits) x (Taxable profits / Augmented profits))

The Marginal Relief Fraction is 3/200 for 2026/27. The effective marginal rate through the relief band is approximately 26.5%.

In practice, most accountancy software handles this calculation automatically. But understanding the formula helps explain why profits in the marginal band are so heavily taxed -- more so than profits above the upper limit.

Anti-Avoidance: Artificial Structures

HMRC is alert to structures designed to multiply the lower profit limit artificially -- for example, splitting a single trade across multiple companies to give each a separate GBP50,000 threshold.

HMRC can apply the associated companies rules broadly and may challenge:

• Multiple companies operated by one individual for what appears to be a single trade
• Companies set up with different nominal shareholders but under common effective control
• Partnership-like arrangements structured as separate companies to obtain multiple profit limits

Where HMRC considers a structure to have been designed principally for tax avoidance, it may apply the Transactions in Securities rules or the general anti-abuse rule (GAAR) to counteract the advantage.

Practical Planning Points

Consolidating Under a Holding Company

Where multiple trading companies are associated, consolidating activities into fewer entities (or using a group structure with group relief) may be administratively simpler and can allow loss surrender between profitable and loss-making entities.

Reviewing Dormant Companies

If your group includes companies that have been dormant for years (former project vehicles, test companies, old subsidiaries), ensuring they remain genuinely dormant -- with no transactions, no bank accounts, and no employees -- ensures they are excluded from the associated companies count.

Monitoring New Incorporations

Any new company formed by you, your spouse, or relatives with whom you have commercial interdependence should be evaluated immediately for associated company status. Taking on a new associated company mid-year can change your corporation tax rate for that accounting period.

Short Accounting Periods

Where a company's accounting period is less than twelve months (because it is newly formed or its year-end has changed), the profit limits are proportionally reduced. A nine-month accounting period has a lower limit of GBP37,500 (9/12 x GBP50,000).

Example: Planning for a Family Business

James and his wife Laura each operate separate limited companies. James runs a marketing agency (Company J); Laura runs an online retail business (Company L). They share an office and their accountant invoices both companies.

Are they associated? The shared office and shared accountant suggest some organisational interdependence. HMRC would likely scrutinise the relationship. If the commercial interdependence test is met, both companies must divide the profit limits between them -- lower limit GBP25,000 each, upper limit GBP125,000 each.

If James' company makes GBP80,000 profit and Laura's makes GBP50,000, without association both pay 19% (below GBP50,000) and 19-25% marginal rate respectively. With association, both face marginal relief from GBP25,000 -- a significantly higher effective rate.

Conclusion

Associated companies rules can significantly increase the corporation tax burden for businesses operating through multiple companies. Understanding who counts as an associated company, how the profit limits are divided, and where HMRC will scrutinise commercial interdependence is essential for any business structured with more than one entity.

The rules are complex and their application to family businesses, holding structures, and partnerships of companies requires careful analysis. If you have multiple companies or are considering new incorporations, reviewing the associated companies position with a qualified tax adviser is strongly recommended.