Associated Companies and Corporation Tax: Are You Under-Declaring Since April 2023? Since 1 April 2023, UK Corporation Tax rules mean your profit thresholds for lower tax rates depend on how many limited companies you or your business partners control. The starting threshold limits of £50,000 for the 19% small profits rate and £250,000 for the 25% main rate are divided by the total number of associated companies plus the company itself. If you own or control more than one active business, your company may be paying tax at a higher rate than you realized.
What Changed on 1 April 2023?
Before April 2023, every UK limited company paid a flat Corporation Tax rate of 19% on taxable profits, regardless of its size or sister businesses.
The UK government reintroduced a tiered Corporation Tax system on 1 April 2023. Under these rules, companies with taxable profits up to £50,000 pay the Small Profits Rate of 19%.
Companies with profits above £250,000 pay the Main Rate of 25%. If your profit falls between £50,000 and £250,000, you pay the 25% rate but can claim Marginal Relief to smooth the transition between 19% and 25%.
These £50,000 and £250,000 threshold figures apply only to a standalone company with zero associated companies during a full 12-month accounting period. If an accounting period is shorter than 12 months, these limits are proportionately reduced.
What Counts as an Associated Company?
A company is associated with another if one person or a group of people has control of both businesses, or if one company controls the other. Under UK close company rules, control can arise through voting rights, share capital ownership, entitlement to distributable income, or rights to assets upon winding up.
Control is not always restricted to holding over 50% of voting shares. Rights held by loan creditors, preference share conditions, or powers in articles of association can also establish control depending on the arrangement.
When considering control across family members or business associates, rights held by connected persons (such as spouses, civil partners, or linear relatives) are attributed only where there is substantial commercial interdependence between the businesses. This interdependence can be financial, economic, or organizational.
An overseas company can be an associated company. UK tax residence is not a requirement, so overseas entities under common control must be evaluated when applying the association tests. Detailed statutory rules are set out in the HMRC Company Taxation Manual CTM03940.
Threshold Reductions and Worked Examples
The statutory £50,000 and £250,000 limits are split equally among all associated companies active at any point during the accounting period. To find your adjusted limits, divide each threshold by N + 1, where N is the number of associated companies.
| Number of Associated Companies (N) | Total Companies under Common Control (N + 1) | Lower Limit (19% Small Profits Rate) | Upper Limit (25% Main Rate) |
|---|---|---|---|
| 0 | 1 company | £50,000 | £250,000 |
| 1 | 2 companies | £25,000 | £125,000 |
| 2 | 3 companies | £16,667 | £83,333 |
| 3 | 4 companies | £12,500 | £62,500 |
Marginal Relief Worked Example
Consider a director who controls two trading limited companies, Company A and Company B. Because Company A has 1 associated company (N = 1), its adjusted lower profit limit is £25,000 and its adjusted upper limit is £125,000.
Assume Company A earns £60,000 in taxable profit during a full 12-month accounting period. Because £60,000 falls between £25,000 and £125,000, Company A qualifies for Marginal Relief.
The standard calculation proceeds as follows using the statutory Marginal Relief fraction of 3/200:
- Calculate tax at the 25% Main Rate: £60,000 × 25% = £15,000.
- Calculate Marginal Relief: (£125,000 − £60,000) × (3 / 200) = £65,000 × 0.015 = £975.
- Deduct relief from main tax liability: £15,000 − £975 = £14,025.
Company A pays £14,025 in Corporation Tax, giving an effective tax rate of 23.375%.
Common Misconceptions to Avoid
1. Entering “0” Associated Companies on the CT600
Directors sometimes assume that if sister businesses trade in different sectors or operate independently, they can be ignored. If they share common control, they must be reviewed under the association rules.
2. Miscounting the Filing Company
The CT600 entry asks for the number of other associated companies, excluding the filing company itself. If you control three active companies in total, the entry on each return is 2.
3. Over-Generalizing Dormant or Passive Company Exemptions
An associated company that has not carried on any trade or business during the accounting period can generally be disregarded. Certain passive holding or investment companies may also qualify for exclusion if they satisfy specific statutory conditions detailed in HMRC CTM03945. However, active property investment companies generally carry on a business and must be counted.
4. Overlooking Quarterly Instalment Thresholds
Companies defined as large pay Corporation Tax in quarterly instalments rather than 9 months after year-end. The £1.5 million profit threshold for quarterly instalments is also divided by the number of associated companies plus the company itself, subject to specific transitional and liability rules.
Declaring Associated Companies on Form CT600
When completing your Company Tax Return, associated companies are reported in Section 6 of Form CT600.
Box 326 is normally used to state the number of associated companies during the accounting period. The filing company itself is not included in this count.
Boxes 327 and 328 are used instead of Box 326 only where the accounting period straddles two financial years, the relevant profit limits have changed, and the number of associated companies was different in each financial year. Separate reporting rules apply to quarterly instalment payers. Tax software uses these entries to scale down your profit thresholds automatically.
Tax Implications of Inaccurate Associated Company Counts
Failing to declare associated companies accurately can lead to miscalculated profit thresholds and underpaid Corporation Tax.
If HMRC identifies unreported associated companies during a review, any unpaid tax must be settled alongside statutory late payment interest from the original due date.
Where an inaccurate return arises from careless or deliberate behavior, HMRC may issue monetary penalties based on a percentage of the underpaid tax. The exact penalty percentage depends on the nature of the behavior and whether the disclosure was unprompted.
What to Do Now: Director Checklist
- List all entities under common control: Identify every limited company, partnership, or overseas entity controlled by you or your close business associates.
- Review trading and business activity: Assess whether each entity carried on a trade or business during the period, or whether it qualified as passive or dormant under HMRC tests.
- Examine filed CT600 returns: Check Box 326 (or Boxes 327 and 328) on returns submitted for accounting periods ended after 1 April 2023.
- Recalculate threshold limits: Recompute lower, upper, and quarterly instalment limits based on the correct associated count and accounting period length.
- Amend returns within statutory limits: If an adjustment is required, submit an amended CT600 return. Companies can generally amend a return within 12 months of the statutory filing deadline.
- Consult a qualified professional: Seek formal tax advice from a chartered accountant or corporate tax specialist regarding complex corporate structures or associate attribution rules.
Frequently Asked Questions
Do dormant companies count as associated companies?
A company that has not carried on any trade or business throughout the relevant accounting period can generally be disregarded. If a company carries on an active trade or business for any part of that period, it must be included.
Does a parent or holding company count?
A parent company counts if it carries on a trade or business. A holding company may be excluded if it satisfies specific statutory criteria for passive investment companies under HMRC rules, such as holding only qualifying 51% subsidiaries and meeting strict asset and expense conditions. Learn more about holding company structure
What if an associated company was formed halfway through the year?
If a company was associated for any part of the accounting period, it is included in the count for that entire period. It does not need to have been associated for the full 12 months to affect your thresholds.
Does an overseas company count toward the total?
Yes. Worldwide companies under common control are evaluated under the same association rules as UK companies. Overseas residence does not automatically exempt a company from being counted.
Disclaimer: This article provides general educational information for company directors and bookkeepers. It does not constitute formal tax or legal advice. Tax laws change frequently, and you should consult a qualified accountant or corporate tax adviser regarding your business’s specific circumstances.
