By Hussein Bhaiji FCCA CTA, Managing Partner. Last reviewed: October 2026.
You run a profitable company and you assume the first £50,000 of profit is taxed at 19%. Then you are told that your wife’s consultancy, which you have nothing to do with day to day, halves your limits and pushes you into marginal relief. Sometimes that is right. Often it is not. So what are associated companies for corporation tax, and when does someone else’s company actually count as one of yours?
Why do associated companies matter? The small profits rate and marginal relief
Corporation tax has three layers for the financial year beginning 1 April 2026, unchanged from the previous three years:
- Profits up to £50,000: the small profits rate of 19%
- Profits over £250,000: the main rate of 25%
- Profits in between: the main rate less marginal relief, giving an effective rate on the slice between the limits of 26.5%
Both limits are divided by one plus the number of associated companies (s18D CTA 2010). One associated company and the lower limit falls to £25,000. Three and it falls to £12,500. For an accounting period of less than 12 months the limits are reduced proportionately as well (s18D(4) CTA 2010), so a six-month period with one associated company has a lower limit of £12,500.
Example
Hartley Joinery Ltd makes £60,000 of profit. On its own, it pays 19% on the first £50,000 and an effective marginal rate of 26.5% on the balance, a bill of £12,150. Now add three associated companies. The lower limit drops to £12,500 and the upper limit to £62,500. The same £60,000 is taxed at 25% with a sliver of marginal relief, giving roughly £14,963. The profit has not changed. The tax has gone up by £2,813 because of who owns what elsewhere.
What is an associated company? The basic control test
The associated company rules start with control. Under s18E(4) CTA 2010, two companies are associated at any time when:
- one controls the other, or
- both are under the control of the same person or persons
Control has the close company meaning. A person controls a company if they exercise, are able to exercise, or are entitled to acquire, direct or indirect control over its affairs. In practice that usually means more than 50% of the shares, the votes, the distributable income or the assets on a winding up (s450 CTA 2010).
Residence is irrelevant. An overseas company counts. So does a company that was only associated for part of the accounting period.
When does a spouse’s company count?
This is the part most people get wrong.
If you personally control both companies, they are associated. Full stop. There is no further test to apply.
The interdependence question only arises where the link runs through an associate, which for these purposes (s448 CTA 2010) includes a spouse or civil partner, a parent, grandparent or remoter ancestor, a child, grandchild or remoter descendant, a brother or sister, a business partner, and the trustees of a settlement made by you or by any relative of yours. In that situation, your spouse’s rights are attributed to you, and the companies are therefore associated, only if there is substantial commercial interdependence between them (s451(4) and s18G CTA 2010).
So the question is not whether your spouse owns a company. Unless you control it yourself, the question is whether the two companies lean on each other.
What counts as substantial commercial interdependence?
There are three kinds of interdependence, and they do not all have to be present. A strong enough link under one heading can be enough.
Financial. One gives financial support to the other, directly or indirectly, or each has a financial interest, directly or indirectly, in the other’s activities.
Economic. They pursue the same economic objective, the activities of one benefit the other, or they share customers.
Organisational. They share management, employees, premises or equipment.
HMRC’s own examples help. A father personally guaranteeing his son’s company’s bank loan as a family matter, with no link to his own company, is not financial interdependence. Nor is the son’s company renting premises that the father owns personally, at a market rent (CTM03785, written for the pre-2023 rules but still HMRC’s guidance on the same test). But two brothers’ companies using substantially common facilities, staff and equipment are.
Warning
Shared premises, an employee who keeps the books for both companies and an unpaid intercompany balance is not a close call. That is organisational and financial interdependence at the same time, and HMRC will almost certainly treat the companies as associated. For accounting periods from 1 April 2023, the three headings come from the Corporation Tax Act 2010 (Factors Determining Substantial Commercial Interdependence) Regulations 2022, SI 2022/1203, made under s18G(3) CTA 2010.
Which companies are not counted as associated companies?
Dormant companies. A company that has carried on no trade or business at any time during the accounting period is disregarded. The same applies if it was associated for only part of the period and was dormant throughout that part (s18E(3) CTA 2010).
Passive holding companies. A holding company is excluded, but the conditions are strict. Throughout the period it must carry on no trade, have at least one 51% subsidiary, hold only shares in those subsidiaries, receive only exempt dividends, pay dividends to its own shareholders in the same period at least equal to those it received, realise no chargeable gains, incur no management expenses and claim no charitable donations (s18F CTA 2010).
Note
Most holding companies fail on these conditions. Bank interest on a deposit account, a management charge to a subsidiary, or retaining a dividend rather than passing it on will all break the exemption and put the company back in the count.
How is corporation tax marginal relief calculated?
Marginal relief = 3/200 × (upper limit − augmented profits) × (taxable profits ÷ augmented profits), deducted from tax at 25%.
Marginal relief applies where augmented profits are above the lower limit but do not exceed the upper limit (s18B CTA 2010). Where a company receives no exempt dividends, the final fraction is 1 and drops out.
Augmented profits means taxable profits plus exempt distributions received from companies outside your group, a detail that catches out anyone holding a minority stake elsewhere.
Example
Hartley Joinery, with no associated companies, makes taxable profits of £60,000 and has no exempt distributions. Tax at 25% is £15,000. Marginal relief is 3/200 × (£250,000 − £60,000) = £2,850, so the corporation tax bill is £12,150.
What should you do next?
Count the companies properly at the start of each accounting period, not when the return is being prepared. A company counts if it is associated at any time in the period, so a change made late in the year usually helps only the next period.
Where there is a genuine choice there is usually tax planning available: whether a company that is barely active, perhaps holding cash that earns interest, should be made genuinely dormant or struck off, whether a holding company can be made genuinely passive, and whether intercompany arrangements can be put on arm’s length terms.
These points only come up when someone reviews the tax position alongside the year end accounts rather than after them, which is why our monthly management accounts carry a running tax position. We are Chartered Certified Accountants and Chartered Tax Advisers, so the same eyes see both. In most cases the tax we save our clients exceeds the fee they pay.
If you own more than one company, or your family does, book a conversation with a Chartered Tax Adviser before your year end. Read more on our Corporation Tax Returns page, or see the £5,400 refund that came from getting this right for a Manchester software consultancy.
Want this checked for your group? Our corporation tax team reviews associated company status for every client, every year.
Associated companies: frequently asked questions
Is a dormant company an associated company?
It is still an associated company, but it is left out of the count. A company that has carried on no trade or business at any time during the accounting period is ignored when the limits are divided, and so is one that was associated for only part of the period and was dormant throughout that part (s18E(3) CTA 2010).
Does my spouse’s company count as associated?
It depends who controls it. If you personally control both companies, they are associated whatever the commercial links. If your spouse or civil partner controls their company and you control yours, the two are associated only if there is substantial commercial interdependence between them, meaning they are linked financially, economically or organisationally (s18G CTA 2010).
Are overseas companies counted?
Yes. Residence is irrelevant: an overseas company counts, and so does a company that was only associated for part of the accounting period.
How do associated companies affect the £1.5m instalment threshold?
The £1.5m threshold for quarterly instalments is divided by one plus the number of associated companies, in the same way as the £50,000 and £250,000 limits, so with one associated company each company’s threshold is £750,000 (SI 1998/3175 reg 3). A company is usually exempt from instalments in its first large year, provided it was not large or very large in the previous 12 months and its profits do not exceed £10m (also divided by one plus the number of associated companies). For instalments, the number of associated companies is fixed at the end of the previous accounting period (reg 3(7)), not counted across the period as it is for the £50,000 and £250,000 limits.