The second company does not come with a second set of tax bands.

The second company almost always starts as an act of tidiness. A new product needs its own brand, a co-founder wants their consultancy kept separate, the agency work does not sit naturally alongside the software, or an investor asks for the intellectual property to live somewhere on its own.

The assumption that quietly rides along with it is that each company gets its own run at the low rate of corporation tax — its own £50,000 at 19% before the 25% main rate starts to bite. It does not. Where the same person controls both, the limits are divided between them, and the tax bill goes up without anybody deciding that it should.

The two limits, and what sits between them

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. 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%.

The arithmetic has one consequence worth holding on to: every extra pound of profit earned inside that band is taxed at a marginal rate of 26.5%, higher than the headline main rate. That is the number to use when you are 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. Any one of those is enough.

Three points founders consistently get wrong:

• It is worldwide. A company incorporated anywhere counts, whether or not it is within the charge to UK corporation tax. A dormant Delaware entity left over from a Y Combinator application is a company.
• It is measured across the whole period, not at the year end. A company that was associated for one day of the accounting period counts for the entire period. Selling the second company in March does not undo the division of the limits for that year.
• Rights held by your associates can be attributed to you. Your spouse or civil partner, your parents and children, and your business partners can all have their holdings treated as yours — but only where there is substantial commercial interdependence between the two companies. That test looks for financial, economic or organisational links: one company financially supporting the other, sharing customers, or sharing management, employees, premises or equipment. Any one of the three types of link is enough on its own.

That last rule cuts both ways, and it is the most useful part of the regime. Your partner's unrelated business is not automatically your associated company. If the two companies genuinely share nothing — no money, no customers, no staff, no premises — the rights are not attributed and the companies are not associated. The rule exists to catch substance, not coincidence.

The companies that do not count

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 exclusion people mean when they say "the dormant one doesn't count", and it is narrower than it sounds. Holding an investment property, running a bank account that earns interest, or licensing a trade mark to the trading company can all amount to carrying on a business. A company with a filleted set of dormant accounts at Companies House and genuinely no activity is safe. One that did a single thing in the year is not.
• 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.

There is also a trap in the other direction. A close investment-holding company — broadly a close company that exists to hold investments rather than to trade — cannot use the small profits rate or Marginal Relief at all. It pays 25% on the first pound. If the second company was set up to hold a buy-to-let or a portfolio, that is the rule to look at before the associated company rules.

Worked example: three brands, one founder

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

• Company A, the original SaaS product — taxable profit £96,000
• Company B, a productised services arm — 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 a flat 25% — £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 rather than £3,990 at 19%.

The group pays £41,375 instead of the £36,240 the founder had in the forecast. The gap is £5,135, and it is entirely a planning error rather than a tax on the structure: a single company earning the whole £171,000 would have paid £41,565, which is marginally more. The rules are doing exactly what they were designed to do — making the tax the same whether you run one company or three.

The cash flow trap nobody sees coming

The same division applies to the threshold at which corporation tax stops being payable in one lump nine months and one day after the year end, and starts being payable in quarterly instalments. A company becomes "large" once its annual profits exceed £1.5 million, and that threshold is divided by the number of associated companies in exactly the same way.

A founder with three companies crosses into instalments at £500,000 of profit, not £1.5 million. The first instalment falls due in month seven of the accounting period — before the year has even ended, and long before the accounts exist. A company that grows through that line without noticing is not merely late; it is paying interest on tax it did not know was due, at HMRC's late payment rate of 7.75% from 9 January 2026.

There is one concession: 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. That buys a single year, and it too is divided by the number of associated companies.

Where this bites beyond corporation tax

Group size also drives the definition of a small or medium-sized enterprise for research and development relief, where linked and partner enterprises are aggregated on a different but overlapping basis. If you are claiming under the SME rules, a second company under common control is not a neutral event. Our post on R&D tax relief for startups covers where those lines sit.

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

1. 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.
2. 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.
3. 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.
4. Count the companies, divide £50,000 and £250,000 by that number, and re-run your corporation tax forecast against the new limits.
5. Divide £1,500,000 by the same number and check whether any company is heading towards quarterly instalments this year or next.
6. If a company is a close investment-holding company, take the small profits rate out of the forecast entirely.
7. Before you incorporate the next entity, price the tax cost against the reason for it. Sometimes the answer is a trading division, a separate share class or a distinct brand rather than a new company.

None of this is an argument for cramming everything into one company. Separate companies are the right answer for genuine risk separation, for a co-founder with a different shareholding, or for a business you intend to sell on its own. It is an argument for knowing the price before you pay it. Our guide to corporation tax for startups covers the wider computation, and the comparison of a sole trader against a limited company is the right place to start if the second venture has not been incorporated yet.

Where we help

We count the associated companies properly, document the interdependence tests, rebuild the corporation tax forecast on the reduced limits, and flag the instalment threshold before it arrives rather than after. Where a group has grown by accident, we model whether it is worth simplifying. Banded fixed fees from £49 + VAT a month. Get started.