When corporation tax stopped being a flat 19%, it brought back a rule that had been dormant for years, and a great many owner-managers with more than one company are still paying more tax than they expect because of it.
The rates, briefly
- 19% small profits rate on profits up to £50,000;
- 25% main rate on profits from £250,000;
- Marginal relief in between, which produces an effective marginal rate of 26.5% on the slice of profit between the two thresholds.
That 26.5% band is the part people miss: profits in the middle are taxed more heavily at the margin than profits above £250,000. Our guide to marginal relief works through the calculation.
Now divide those thresholds
Both the £50,000 and the £250,000 limits are divided by the number of associated companies, counting the company itself. The effect is blunt:
- One company: 19% up to £50,000, 25% from £250,000.
- Two associated companies: 19% up to £25,000 each, 25% from £125,000 each.
- Four associated companies: 19% up to £12,500 each, 25% from £62,500 each.
A company making £60,000 of profit pays 19% if it stands alone. Put a second associated company alongside it and the same £60,000 is well into marginal relief territory. Nothing about the trade changed, only the group around it.
What counts as "associated"
One company is associated with another if, at any time in the accounting period, one controls the other, or both are under the control of the same person or persons. Control is generally more than 50%, of share capital, voting power, or entitlement to income or assets on a winding up.
Two features surprise people:
- It is not limited to formal groups. Two entirely unconnected trades, owned by the same person, with no shareholding between them, are associated. The classic case is a consultancy and a property company owned by the same director.
- Rights of associates can be attributed to you, including those of a spouse, civil partner, parents, children and siblings, but generally only where there is substantial commercial interdependence between the companies, financial, economic or organisational. Your spouse's entirely separate business is usually not associated with yours; one that shares premises, staff, customers or funding may well be.
What does not count
- Dormant companies are excluded. A shelf company you never traded through does not dilute your thresholds.
- Passive holding companies meeting the conditions are excluded, broadly, a pure holding company with no trade of its own and no income other than distributions passed straight on.
- Companies associated for only part of the period still count for that period, association is tested at any point in the year, not on the last day.
It reaches further than the rate
The associated companies count also divides the £1.5 million and £20 million thresholds for quarterly instalment payments, so a group can be pushed into paying corporation tax in advance while each individual company still feels small. See our guide to corporation tax deadlines and payments.
What to do about it
- Count properly, and count early. The number is needed for the computation, and getting it wrong understates the liability.
- Strike off or formally dormant-ise companies you no longer use, rather than leaving them dangling.
- Review the structure. Where several companies exist for historical reasons, a single company with divisions, or a properly constituted group, may be both simpler and cheaper. Our note on holding companies for SMEs covers when a group structure earns its keep.
- Time profits deliberately where the marginal band is in play.
We review associated company positions as standard when preparing corporation tax computations, because it is one of the few places where a structural fact, not a transaction, changes the bill. If you own more than one company, book a structure review through our tax planning team.