Associated companies: how companies under common control share the corporation tax limits

By Buzz Accounting · 9 September 2026

Founders set up a second company for practical reasons. A new product needs its own brand, a co-founder wants their consultancy kept separate, agency work does not fit alongside the software, or an investor wants the intellectual property held in a company of its own.

It is easy to assume that each company gets its own £50,000 of profit at the 19% small profits rate before the 25% main rate applies. Where the same person controls both companies, the limits are divided between them, which can increase the total tax bill.

The corporation tax limits and Marginal Relief

Since 1 April 2023 corporation tax has had two rates and a sliding scale in the middle:

Taxable profits up to the lower limit of £50,000 — the small profits rate of 19%.
Profits above the upper limit of £250,000 — the main rate of 25% on the whole amount.
Between the two — the main rate of 25%, reduced by Marginal Relief.

Marginal Relief is worked out as the standard fraction of 3/200 multiplied by the difference between the upper limit and the company's augmented profits (taxable profits plus certain dividends received). On £120,000 of profit that is 3/200 × (£250,000 − £120,000) = £1,950, so the bill is £30,000 − £1,950 = £28,050, an effective rate of 23.4%.

Each extra pound of profit inside that band is taxed at 26.5%, which is higher than the 25% main rate. Use 26.5% when deciding whether to spend money before the year end or take it out afterwards.

What an associated company is

Two companies are associated if one controls the other, or if both are under the control of the same person or persons. Control follows the close company definition in Part 10 of the Corporation Tax Act 2010: more than half the share capital, more than half the voting power, entitlement to more than half the distributable income, or entitlement to more than half the assets on a winding up, and any one of those is enough.

Three further points:

Overseas companies count. A company incorporated anywhere counts, whether or not it pays UK corporation tax, so a Delaware company set up for US investors can be an associated company.
It applies to the whole accounting period. A company that was associated for one day of the accounting period counts for the entire period, so selling the second company in March still divides the limits for that year.
Rights held by your associates can be attributed to you. The holdings of your spouse or civil partner, your parents and children, and your business partners can all be treated as yours, but only where there is substantial commercial interdependence between the two companies. That test looks for financial, economic or organisational links, such as one company financially supporting the other, the two sharing customers, or the two sharing management, employees, premises or equipment. Any one of the three types of link is enough.

So a spouse's unrelated business is not automatically associated with your company. If the two companies share no money, customers, staff or premises, the rights are not attributed and the companies are not associated.

Companies that are disregarded

Two exclusions matter to early-stage groups:

A company that has not carried on any trade or business at any time in the accounting period is disregarded. This is the rule behind the idea that a dormant company does not count, and it applies only where there was no business activity at all. Holding an investment property, holding a bank account that earns interest, or licensing a trade mark to the trading company can all count as carrying on a business. Only a company that did nothing at all in the period is disregarded.
A passive holding company is disregarded where it holds nothing but shares in its 51% subsidiaries, has no income or expenditure other than dividends from those subsidiaries which it passes straight on to its own shareholders, and no chargeable gains. A holding company that charges management fees down to the operating company fails this test.

A close investment-holding company, broadly a close company that exists mainly to hold investments, cannot use the small profits rate or Marginal Relief. It pays 25% from the first pound of profit. Letting property to unconnected people does not make a company a close investment-holding company, but holding shares, loans or property let to a connected person can. If the second company was set up to hold property or investments, check this rule before the associated company rules.

Worked example: three companies controlled by one founder

The figures below are illustrative. A founder controls three trading companies, each with a 31 March 2027 year end, set up over four years as separate brands:

Company A, the original software product — taxable profit £96,000
Company B, a services business — taxable profit £54,000
Company C, a small hardware line — taxable profit £21,000

All three are associated, so each divides the limits by three: a lower limit of £16,667 and an upper limit of £83,333.

Company A is above its reduced upper limit, so it pays 25% on all its profit, £24,000. Standing alone it would have had Marginal Relief of 3/200 × (£250,000 − £96,000) = £2,310, and a bill of £21,690.

Company B sits inside the reduced band. Its relief is 3/200 × (£83,333 − £54,000) = £440, giving £13,060 against the £10,560 it would have paid alone. Company C, just above its £16,667 lower limit, pays £4,315, where it would have paid £3,990 at 19% on its own.

The three companies pay £41,375 in total, where the founder's forecast showed £36,240, a difference of £5,135. The error was in the forecast, and splitting the business has not added tax, because a single company earning the whole £171,000 would have paid £41,565, slightly more. The associated company rules are designed to make the tax roughly the same whether the profit is earned in one company or several.

Paying corporation tax in quarterly instalments

The same division applies to the threshold for paying corporation tax in quarterly instalments, which replace a single payment nine months and one day after the year end. A company is "large" for this purpose once its annual profits exceed £1.5 million, and that threshold is divided by the number of associated companies, counting the company itself.

With three associated companies, each company pays by instalments once its profits exceed £500,000. For a 12-month accounting period the first instalment is due 6 months and 13 days after the period starts, before the year has ended and long before the accounts are prepared. A company that crosses the threshold without noticing is charged interest on each underpaid instalment, at 6.25% a year since 29 December 2025, and at HMRC's late payment rate of 7.75% once the normal payment date has passed.

A company is not treated as large for a period if its profits do not exceed £10 million and it was not large in the previous twelve months. This exception applies only to the first year over the threshold, and the £10 million is also divided by the number of associated companies.

Effects beyond corporation tax

Group size also affects whether a company is a small or medium-sized enterprise (SME) for research and development relief, where linked and partner enterprises are added together under different but overlapping rules. The enhanced relief for loss-making R&D-intensive companies is only for SMEs, so a second company under common control can affect a claim, because linked and partner businesses count towards the size test. Our R&D tax relief page covers that relief.

The Employment Allowance is also restricted to one company across a group of connected companies, and the VAT registration threshold can be looked at across companies where HMRC considers a business has been artificially separated.

What to do this week

List every company anywhere in the world in which you, your spouse or civil partner, your parents, your children or your business partners hold shares or voting rights. Include dormant ones and overseas ones.
For each, mark whether it carried on any trade or business at any point in your accounting period. Only a company that did neither is disregarded.
For the ones that remain, ask whether there is a financial, economic or organisational link to your company: shared money, shared customers, or shared people, premises or equipment. Write down the answer and the reason, because that note is your defence if HMRC asks.
Count the companies, divide £50,000 and £250,000 by that number, and re-run your corporation tax forecast against the new limits.
Divide £1,500,000 by the same number and check whether any company is heading towards quarterly instalments this year or next.
If a company is a close investment-holding company, take the small profits rate out of the forecast entirely.
Before you set up another company, compare the tax cost with the reason for it. A trading division, a separate share class or a separate brand within the existing company may do the same job.

Separate companies make sense to keep business risks apart, for a co-founder with a different shareholding, or for a business you intend to sell on its own. Work out the tax cost before setting one up. Our guide to corporation tax for startups covers the wider calculation, and our comparison of a sole trader against a limited company is useful if the second business has not yet been set up as a company.

Where we help

We count the associated companies, record how the interdependence tests apply, rebuild the corporation tax forecast on the reduced limits, and tell you before a company reaches the instalment threshold. Where a group of companies has grown without a plan, we work out whether it is worth simplifying. Your monthly accounting fee comes from the instant quote. Get started.

Common questions

What counts as an associated company for corporation tax?

Two companies are associated if one controls the other, or if both are controlled by the same person or persons. Control means more than half the share capital, more than half the voting power, entitlement to more than half the distributable income, or entitlement to more than half the assets on a winding up, and any one of those is enough. It applies to companies incorporated anywhere in the world, and a company only has to be associated for a single day of your accounting period to count for the whole of it. The rights of a spouse, parent, child or business partner can also be attributed to you, but only where the two companies are substantially commercially interdependent.

How much extra tax does a second company cost?

It depends on where the profits sit. If each company's profits are below the reduced lower limit, or above £250,000, association makes no difference. The cost arises when a company that would have had Marginal Relief loses some or all of it, or a company that would have paid 19% is pushed into the marginal band. In our illustrative example, three companies with £171,000 of combined profit pay £41,375 where they would have paid £36,240 standing alone, a difference of £5,135. A single company earning the same total would pay £41,565, so the rules take away the saving from splitting profits across companies, leaving the tax close to what one company would pay.

Does a dormant company count as an associated company?

Only if it carried on a trade or business at some point in the accounting period. A company that carried on neither at any time in the period is disregarded. Holding an investment property, earning bank interest on a meaningful balance, or licensing intellectual property to a group company can all count as carrying on a business, even for a company thought of as dormant. If yours did anything in the period, check the position, because the answer changes the limits for every other company you control.

Is my spouse's company automatically associated with mine?

No. Rights held by an associate, which includes a spouse or civil partner, parents, children and business partners, are attributed to you only where there is substantial commercial interdependence between the two companies. That is tested by looking for financial links, such as one company funding or financially supporting the other, economic links, such as a common customer base or activities that benefit each other, and organisational links, such as shared management, employees, premises or equipment. Any one type of link on its own is enough to create the association. Where the two businesses share nothing, the attribution does not apply and the companies are not associated.

What is the marginal rate of corporation tax between the limits?

26.5%. Between the lower and upper limits a company pays the 25% main rate reduced by Marginal Relief of 3/200 of the difference between the upper limit and its augmented profits, which produces an effective rate that rises smoothly from 19% to 25% across the band. Because the relief shrinks as profits grow, each extra pound of profit inside the band costs 26.5p of tax, more than the 25% main rate. Use 26.5% when deciding whether to bring a purchase forward, make an employer pension contribution or pay a bonus earlier, because a deduction inside the band saves tax at that rate.

Do associated companies affect when corporation tax has to be paid?

Yes. A company must pay corporation tax in quarterly instalments once its annual profits exceed £1.5 million, and that threshold is divided by the number of associated companies, counting the company itself, in the same way as the rate limits. Three associated companies each reach instalments at £500,000 of profit. The first instalment is due in month seven of a 12-month accounting period, before the year end and long before the accounts are prepared, so a company that crosses the threshold without noticing is charged interest on the underpaid instalments, at 6.25% a year since 29 December 2025. There is an exception for the first year: a company is not treated as large if its profits do not exceed £10 million, divided in the same way, and it was not large in the previous twelve months.

Can I avoid association by making my co-founder a shareholder?

Sometimes, but only where the shareholding changes who controls each company. The attribution and interdependence rules are designed to catch holdings rearranged only to avoid the limits. If your co-founder holds a real, commercially agreed stake that takes control of the second company out of your hands, and the companies do not share funding, customers, staff or premises, the companies may not be associated. If shares are issued on paper while you run both businesses from the same office with the same team, HMRC can treat the companies as associated. Settle the commercial reason first, then check the tax position.

Does the small profits rate apply to a property company?

Usually, if it lets property to people it is not connected with. A close investment-holding company, broadly a close company that exists wholly or mainly to hold investments, cannot use the small profits rate or Marginal Relief and pays the 25% main rate from the first pound of profit. Letting property to unconnected people is excluded from that definition, so an ordinary buy-to-let company is usually not affected, but a company holding shares, loans or property let to a connected person may be. Check this before working out the associated company limits, because a close investment-holding company pays 25% whatever the limits.