Associated companies: the divisor that quietly raises your corporation tax bill
The £50,000 and £250,000 corporation tax limits are not fixed. They are divided by the number of associated companies plus the company itself, so a second company, or one you assumed was finished, can raise the tax on the first without changing a penny of its profits. This is a close reading of Part 3A of the Corporation Tax Act 2010: how association is actually tested, the two narrow exclusions, the interdependence gate that saves most family situations, and a diagnostic to run before your next period end.
The divisor is not the number of associates, it is that number plus one
Corporation tax stopped being a single rate on 1 April 2023. Section 18A of the Corporation Tax Act 2010 gives the small profits rate of 19 per cent to a UK resident company that is not a close investment-holding company and whose augmented profits do not exceed the lower limit of GBP 50,000. Above the upper limit of GBP 250,000 the main rate of 25 per cent applies to the whole of the profits, and in between marginal relief tapers the bill at an effective rate of 26.5 per cent, higher than the main rate itself. Augmented profits add dividends from companies outside the group, so a company can breach a limit on income that never appears as taxable profit. The limits sit in section 18D, inserted with Part 3A by Schedule 1 to the Finance Act 2021, and where there are associated companies both are divided by one plus the number of them. HMRC put it beyond argument at CTM03935: one associate gives GBP 25,000 and GBP 125,000, three give GBP 12,500 and GBP 62,500. The company being taxed is always in the divisor. For the financial year 2026 nothing has moved: 19 per cent, 25 per cent, fraction 3/200.
An illustrative example: the consultancy and the property company next door
The following is illustrative and the figures are invented. A director owns all the shares in a consultancy company making taxable profits of GBP 120,000 for the year to 31 March 2027, and all the shares in a company letting two flats commercially to unconnected tenants on profits of GBP 30,000. Neither receives outside dividends, so augmented profits equal taxable profits and the section 18B formula reduces to the fraction applied to the shortfall below the upper limit. Alone, the consultancy is inside the band: 25 per cent of GBP 120,000 is GBP 30,000, less 3/200 of the GBP 130,000 shortfall, which is GBP 1,950, giving GBP 28,050. The property company, under the lower limit, pays 19 per cent on GBP 30,000, or GBP 5,700. Total GBP 33,750. Now the rule. Each has one associate, so each works to GBP 25,000 and GBP 125,000. The consultancy's relief falls to 3/200 of GBP 5,000, that is GBP 75, so it pays GBP 29,925. The property company is now inside the marginal band: GBP 7,500 less 3/200 of GBP 95,000, which is GBP 1,425, giving GBP 6,075. Total GBP 36,000. The same profits in the same hands cost GBP 2,250 more because there are two companies rather than one.
What makes two companies associated, in the words of the statute
Section 18E(4) makes a company an associated company of another at any time when one of the two controls the other, or both are under the control of the same person or persons. Control takes its meaning from section 450, which section 18E(5) imports: a person controls a company if they exercise, are able to exercise or are entitled to acquire direct or indirect control over its affairs, or if they possess or could acquire the greater part of the share capital, the voting power, the income were it all distributed, or the assets on a winding up. The words the same person or persons do real work here. Section 450(5) treats two or more people who together satisfy a test as having control, so a pair who between them control both companies create an association even where neither controls either alone. Residence is irrelevant, and HMRC say so at CTM03940. Section 18E(6) makes all of this subject to sections 18G to 18J, covering attributed rights, fixed-rate preference shares, loan creditors and trustees.
Where a relative's separate company does, and does not, bite
This is where most owners panic unnecessarily. Section 451(4) permits the rights and powers of a person's associates to be attributed to that person, and section 448 defines associate to include any relative or partner; relative means a spouse or civil partner, a parent or remoter forebear, a child or remoter issue, and a brother or sister. There is no age limit on the child, so the shorthand about minor children understates the reach. Read alone, that would associate your company with your sister's unrelated business. Section 18G stops it. Where the relationship between the two companies is not one of substantial commercial interdependence, the person is treated as having no associates for the purposes of section 451(4) and (5). The factors come from regulation 3 of the Corporation Tax Act 2010 (Factors Determining Substantial Commercial Interdependence) Regulations 2022, adopting paragraph 3(3) of Schedule 1 to the National Insurance Contributions Act 2014. Financial: one supports the other, or each has a financial interest in the other's activities. Economic: a shared economic objective, one benefiting the other, or common customers. Organisational: common management, employees, premises or equipment. HMRC confirm at CTM03950 that a sufficient financial link alone will do. One intercompany loan or one shared bookkeeper can be enough.
The two ways out, and why one day of association costs a whole year
Section 18E(3) disregards an associated company that carried on no trade or business at any time in the accounting period, or, if associated for only part of it, in that part. Business is wider than trade. A company that lets one flat, holds investments or charges a management fee is carrying on a business, and the Companies House meaning of dormant does not decide this test; a company can file dormant accounts and still be counted. The reliable position is no transactions at all. The second exclusion, section 18F, is narrow. It treats an investment business as no business where, throughout the period, the company has no trade, one or more 51 per cent subsidiaries and is passive: no assets but shares in those subsidiaries, no income but exempt dividends redistributed in at least the same amount, and no gains, management expenses or charitable donations. One property at the top breaks it. Section 18E(1) counts a company for the whole period if it is associated for any part of it, so dissolving a second company in month eleven does not restore the full limits. Only section 18D(4) genuinely assists, reducing both limits proportionately for a period shorter than twelve months. If a redundant company is going to go, have it gone before the period begins.
The same divisor lands on the instalment thresholds
A company is large for quarterly instalment purposes if its profits run at an annual rate above GBP 1.5 million, and very large above GBP 20 million. The same divisor applies. HMRC divide the GBP 1.5 million figure by the number of associated companies plus your company, and CTM92520 confirms the test reverted from related 51 per cent group companies to associated companies for periods beginning on or after 1 April 2023. CTM92800 reduces the GBP 20 million threshold the same way. A company on GBP 800,000 with a single associate becomes large overnight, its threshold halved to GBP 750,000. Its first instalment then falls six months and thirteen days after the period begins rather than nine months and one day after it ends, so on a year to 31 March 2027 that is 14 October 2026 instead of 1 January 2028, pulling the first payment forward by about fourteen and a half months. Two let-offs exist, not one: a total liability under GBP 10,000; or profits no greater than GBP 10 million where the company was not large in the preceding twelve months, and that GBP 10 million is divided in the same way.
A diagnostic to run before your next period end
List every company in which you, your spouse or civil partner, your children, parents, siblings or business partners hold shares or voting rights, including the ones you assume are finished. Ask three questions of each. Does one control the other, or do the same person or persons control both, applying section 450 including rights merely capable of acquisition? If association arises only by attributing a relative's rights, is there any financial, economic or organisational link between them? Did it carry on any trade or business at any time in the period? Then a fourth, about your own company: is it close, and does it exist wholly or mainly to trade or to let land commercially? Section 18N denies the small profits rate and marginal relief altogether to a close investment-holding company, and a letting to a connected person or their relative is not commercial. Three traps do most of the damage: the sibling or spouse company sharing a bookkeeper, a landlord or a loan; the old company nobody struck off that still charges a fee; and the new venture nobody priced against the existing one. Ask your accountant for the divisor on the last return and the companies behind it, well before the tax falls due nine months and one day after the period end.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.