How the Associated Companies Rule Affects Your Corporation Tax Rate
Since April 2023, Corporation Tax in the UK has no longer been a flat 19%. Instead, it follows a tiered system, with rates ranging from 19% to 25% depending on the company’s taxable profits.
But there’s another key detail that affects which rate you pay — and it’s often overlooked: the associated companies rule.
This rule can drag your Corporation Tax rate up even when profits are relatively modest, simply because your company is connected to another one. It can also reduce or eliminate access to marginal relief, which many companies now rely on to stay below the full 25% rate.
As we approach the end of 2025, HMRC is enforcing these rules firmly — and business owners need to be clear on how associated companies work, how to plan for them, and when to restructure.
Corporation Tax rates since April 2023: a quick recap
As of the 2025/26 tax year, the current Corporation Tax rates are:
- 19% – if your taxable profits are £50,000 or less
- 25% – if your taxable profits are £250,000 or more
- Between 19% and 25% – if profits are between those limits, with marginal relief applied
But these thresholds are not fixed for every company. That’s where the associated companies rule comes in.
What is the associated companies rule?
If your company is associated with one or more other companies — whether in the same group or controlled by the same person — the £50,000 and £250,000 limits are divided between them.
For example:
- If you have two associated companies, the limits are halved: £25,000 (small) to £125,000 (large)
- If you have five associated companies, the limits are divided by five: £10,000 (small) to £50,000 (large)
That means your company could hit the 25% tax rate with as little as £50,000 in profits if there are four other companies associated with it.
This can be a shock for directors who assumed they were below the higher rate threshold.
What counts as an associated company?
HMRC defines companies as “associated” if:
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One company has control of the other, or
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Both companies are under common control — whether by individuals or groups of people acting together
“Control” means more than just 50% shareholding. It includes rights to income, assets on winding up, and voting power. So even minority holdings can create association if they give effective control.
The rule looks at the 12-month accounting period, not just a snapshot. So companies that are connected for only part of the year may still be associated.
Common examples of associated companies
Here are some real-world examples where the rule applies:
- A business owner runs two limited companies in different sectors (e.g. a café and a cleaning business)
- A couple own separate companies, but shares are held in each other’s names
- A shareholder has 50% of one company and 50% of another, and jointly controls both with a partner
- A group of companies under a parent company structure
- A trading company and an investment property company, both owned by the same director
In all these cases, the companies may be associated — and must share the Corporation Tax thresholds.
What doesn’t count as associated?
HMRC excludes companies that are:
- Dormant for the full accounting period
- Not carrying on a trade or business in the year
- Under common control but in separate commercial activities, and with no substantial interdependence (this is rare, and only applies in narrow cases)
You can’t just declare a company inactive and assume it’s excluded. HMRC may still treat it as associated unless it’s truly dormant and non-trading throughout the period.
How this affects your tax bill
Let’s say you run a single company with £100,000 taxable profits.
- If it’s your only company, you fall between the £50,000 and £250,000 thresholds — and you get marginal relief, bringing your effective tax rate to around 22.75%.
- But if you have one associated company, the thresholds are halved — so your £100,000 now falls into the 25% bracket, and you lose marginal relief.
That’s a jump from ~£22,750 to £25,000 tax — just because of association.
If you have multiple small companies, each making modest profits, the combined impact can be thousands of pounds in extra tax annually.
Planning and restructuring: what are your options?
If you currently operate multiple companies, it’s time to review whether your structure still makes sense — both commercially and for tax.
Key steps include:
1. Map your ownership and control
Do you have voting rights, shareholdings, or effective control in multiple companies? Do spouses or family members hold shares across entities?
You may be associated even if the companies operate separately.
2. Review inter-company activity
If your companies trade with each other, share resources, or are part of a commercial group, they are almost certainly associated. Keeping them separate “on paper” will not change this.
3. Check dormant status carefully
Dormant companies are excluded — but only if they meet HMRC’s definition. That means no income, no expenses, and no business activity.
4. Consider merging companies
In some cases, merging two associated companies into one may reduce admin, simplify reporting, and keep profits within the small company band.
But be careful — this has legal, tax, and operational implications, and must be properly planned.
5. Discuss group planning
If you run a group of companies, it may be better to embrace the structure and use group relief, loss transfers, or shared costs to your advantage.
What about investment companies?
Investment companies — especially property SPVs — are often overlooked when it comes to associated company planning.
If you own a trading company and a separate property company personally, and both are profitable, your thresholds will be divided. That’s a common scenario for landlords who also run businesses, and it can lead to higher tax than expected.
Even holding companies or dormant companies with assets (e.g. cash or property) may still be classed as active for tax purposes.
Final thoughts
The associated companies rule is one of the most important — and misunderstood — aspects of Corporation Tax planning in 2025/26.
Many directors are now finding themselves paying the full 25% rate, even on modest profits, simply because of the way their business interests are structured. HMRC is enforcing the rule strictly, and there’s little scope for avoidance unless a genuine commercial case exists for independence.
At Merranti, we help business owners review their group structures, assess associated company risks, and make decisions about merging, separating, or reclassifying companies for tax efficiency. With another tax year fast approaching, now is the time to get clarity on where you stand.
Unsure if your companies are associated — or paying too much Corporation Tax?
Contact Merranti Accounting today for a Group Structure and Tax Efficiency Review.
