Associated company rules: how multiple limited companies affect corporation tax

If you’re involved in more than one limited company, it can affect how much Corporation Tax those companies end up paying. That’s because of the associated company rules.

Companies are treated as associated where they’re under common control. In simple terms, it means the same person or the same group ultimately controls them.

In other words, you do not need to own a majority of shares to be treated as being in control. The control may also derive from clauses in shareholder agreements or rights to income and capital.

Since the new Corporation Tax regime was implemented in April 2023, if more than one company is under common control, the Corporation Tax thresholds are divided between them.

This can have a significant impact on your post-tax income, even if you have two companies, and one of them barely makes a profit. In this guide, Christian Hickmott, MD of Integro Accounting explains more.

The 2023 changes to Corporation Tax

The rate of Corporation Tax your company pays is based on how much profit it makes.

• 19% on profits up to £50,000
• 25% on profits over £250,000
• A system of marginal relief applies to profits between these two thresholds

Importantly, where a company has associated companies, these thresholds are divided among all of them. The more companies involved, the smaller each company’s share of those limits.

How the thresholds are divided

The limits are split equally between the total number of associated companies, including the company itself.

• 1 company: £50,000 / £250,000
• 2 associated companies: £25,000 / £125,000
• 3 associated companies: approx. £16,667 / £83,333

So if you run two companies and one makes £40,000 profit, £15,000 of this is pushed into the marginal relief band, whereas previously it would qualify for the 19% rate as a standalone company.

The thresholds are based on what HMRC refers to as augmented profits. Broadly, this is taxable total profits plus certain exempt distributions received from other companies. Some distributions, including certain distributions from companies within the same 51% group, are excluded from the calculation.

You can use our marginal relief and associated companies calculator to work out the tax cost if you have associated companies.

What does ‘associated’ mean?

Two or more companies are ‘associated’, where control rests with:

• The same individual
• Connected individuals – such as spouses or close family members
• Individuals acting together

However, where control only arises by attributing the rights of connected individuals, companies are not always treated as associated if there is no substantial commercial interdependence between them.

If you have any involvement in more than one limited company, we recommend you talk to your accountant to determine whether there is any shared control.

Even if you don’t think companies are linked in a commercial sense, HMRC may still determine that there is an element of common control.

What counts as control?

Control can arise through shareholdings, share structures, share capital, shareholder agreements, or rights to income and capital.

An individual doesn’t need to hold a majority shareholding. They may be able to influence how a company operates or benefit from it financially in other ways.

You can read HMRC’s technical guidance on the associated companies rules at GOV.UK.

What about dormant companies?

A dormant company is usually excluded from the associated companies count, provided it has no trading activity and no income during the accounting period.

However, if the company receives income – even a small amount of bank interest – it may fall within the associated companies rule. If you overlook even a small, seemingly insignificant transaction, it could prove costly.

For more details, read HMRC’s guidance on dormant companies for Corporation Tax.

Are you affected?

If you operate through one single limited company (as most contractors do), and neither you nor relevant connected parties control another company, you are not affected.

The associated company rules only become relevant once you are involved in more than one company – either directly, or where a connected person, such as a spouse, also controls a company.

Again, if the rules apply, this may:

• Reduce or remove the company’s access to the small profits rate
• Push some profits from the small profits rate into marginal relief or the 25% rate
• Increase the overall tax your company pays despite no increase in profits

Can you bypass the associated company rules?

No, and an attempt to change ownership to sidestep the rules is unlikely to be successful.

Control is based on the reality of the situation, not just the share register.

The key is to understand how the rules work if you are considering involvement in more than one company, or if you share any elements of control with family members.

Associated companies calculator

Use our Corporation Tax marginal relief and associated companies calculator to estimate how these rules affect your company.