Associated Company Rules: Are Your Corporation Tax Thresholds Protected?
Running more than one limited company is common for many owner-managed businesses.
You may have a trading company alongside a property company. You might also have a separate company for another type of business, a holding company or a dormant company that has been kept for a brand name or future project.
Each company may have made sense when it was set up.
The issue is that, for Corporation Tax purposes, HM Revenue & Customs (HMRC) may not look at those companies in isolation.
Under the associated company rules, companies that are connected can reduce the Corporation Tax thresholds available to each company. This can affect both the rate of Corporation Tax payable and in some cases when that tax needs to be paid.
Why does this matter?
Since 1 April 2023, the UK has had a tiered Corporation Tax system.
For the financial year starting 1 April 2026, the main Corporation Tax rates are:
- 19% for companies with profits up to £50,000
- 25% for companies with profits over £250,000
- Marginal relief for companies with profits between £50,000 and £250,000
On the face of it, that looks fairly straightforward.
However, if a company has associated companies, the £50,000 and £250,000 thresholds are divided by the total number of associated companies including the company itself.
That means a business owner who expects one company to benefit from the full small profits rate may find that the threshold is much lower than expected.
For example, if there are four associated companies in total, each company’s lower limit could reduce to £12,500 and the upper limit to £62,500.
So, a company with £40,000 of taxable profits may no longer sit comfortably within the 19% small profits rate. Instead, it could fall into the marginal relief band resulting in more Corporation Tax payable than if it was a single unassociated company.
What is an associated company?
The starting point is control.
A company will usually be associated with another company if:
- One company controls the other; or
- Both companies are under the control of the same person or persons.
Control is wider than simply looking at who owns the shares.
It can include voting rights, rights to income, rights to assets on a winding up and rights held indirectly.
The rules can also take into account the rights of a person’s associates, including spouses, civil partners, children, parents, siblings, business partners and certain trustees.
This is where the position can become more complicated for family businesses and owner-managed groups.
Are family companies always associated?
Not automatically – this is an important point.
Just because two people are married, related or connected does not necessarily mean their companies are automatically associated.
HMRC will look at whether there is substantial commercial interdependence between the companies.
For example, a husband may run a building company and his wife may run a completely separate business in an unrelated sector. If the businesses have separate customers, separate premises, separate staff, separate funding and separate management, they may not be associated simply because the owners are married.
However, the position can change if the companies share customers, premises, staff, funding, equipment, admin support or management.
What is substantial commercial interdependence?
HMRC looks at three main areas.
- Financial interdependence. This could include inter-company loans, guarantees, shared finance arrangements, or one company providing financial support to another.
- Economic interdependence. This may apply where companies work towards the same commercial objective, share customers, refer work between each other, or where one company’s activities benefit the other.
- Organisational interdependence. This can include shared management, employees, premises, equipment, systems or admin support.
You do not need all three types of connection for there to be an issue. A strong link in one area may be enough, depending on the facts.
Common examples include:
- Companies sharing premises
- Inter-company loans without clear commercial terms
- Shared employees or management
- Shared customer bases or regular referrals
- One company supplying goods or services to another on non-commercial terms
- Shared vehicles, equipment, software or admin support
Good records are important. If companies are genuinely separate, it helps to keep evidence showing separate customers, separate premises, separate employees, separate management and properly priced transactions.
Dormant companies can still cause issues
Another common misunderstanding is around dormant or inactive companies.
Not every related company reduces the thresholds. A company may be disregarded if it has not carried on any trade or business during the relevant accounting period.
However, a company can appear inactive but still fail this test.
For example, small bank interest, rental income, investment activity or a one-off invoice could mean the company has carried on business activity.
It is also important to separate Companies House dormancy from Corporation Tax dormancy. Filing dormant accounts at Companies House does not automatically mean the company is ignored for associated company purposes.
Dormant companies kept for a brand name, project or future idea should therefore be reviewed carefully.
Associated companies can also affect payment dates
The associated company rules do not just affect the Corporation Tax rate.
They can also affect when Corporation Tax is due.
A company is usually treated as large for Corporation Tax payment purposes if its annual taxable profits exceed £1.5 million. However, that threshold is also divided by the number of associated companies.
For example, if there are three associated companies in total, the £1.5 million threshold is divided by three. This reduces the threshold to £500,000.
That means a company with taxable profits of £600,000 may be brought into the quarterly instalment payment regime, even though it would not have been treated as large on a standalone basis.
This can create a real cashflow issue if it is not planned for in advance.
Common situations that catch business owners out
The associated company rules can become relevant in many everyday business situations.
A forgotten company may have been kept for a brand name or old project, but if it has any activity it may still count.
A property company may hold premises and rent them to a trading company, creating financial, economic or organisational links.
A family member may start a separate company but receive loans, premises, equipment or referrals from another family business.
Two spouses may run separate companies but share admin support, vehicles, staff or customers.
A personal investment company may not be dormant if it holds investments, receives income or carries on business activity.
These are not unusual structures. In many cases, they are commercially sensible. The key point is that they need to be reviewed properly so the tax position is understood.
Practical steps to protect your position
If you run more than one company, or have family members or business partners with their own companies, it is worth reviewing the position before the next year-end.
As a starting point, you should:
- Review all connected companies each year
- Check whether dormant or unused companies are still needed
- Make sure any transactions between companies are on commercial terms
- Keep proper agreements, invoices and records
- Separate operations where possible
- Review profit forecasts across the group
- Document why companies are genuinely independent, where relevant
Where companies are unavoidably associated, planning still matters.
Looking at projected profits early may allow time to consider the timing of expenditure, pension contributions, capital allowances and other reliefs. This can help manage exposure to the marginal relief band and avoid unexpected corporation tax bills.
Final thoughts
The associated company rules can have a bigger impact than many business owners expect.
They can reduce the Corporation Tax thresholds available to each company, move profits into the marginal relief band earlier than expected and bring forward Corporation Tax payment dates under the quarterly instalment regime.
If you operate more than one company, are part of a family business structure, have a property company, or are thinking about setting up a new company now is a good time to review the position.
A clear review can help identify which companies count, whether any exclusions apply and whether your group is at risk of higher tax rates or earlier payment deadlines.
If you would like us to review your associated company position before your next year-end, please get in touch with the team at SeavorChartered.
