Many owners set up a second company without a second thought — for a side venture, a property portfolio or a new client contract. What often gets missed is the effect on corporation tax. Adding a company can raise the tax bill of every company you already own, even if none of their profits change.
Why does a second company change my corporation tax?
Since 1 April 2023, corporation tax has had two rates: 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between. Those rates still apply for the financial year beginning 1 April 2026.
The £50,000 and £250,000 limits aren’t per company. They’re divided by the number of associated companies, counting the company itself. With one associated company, each company’s limits fall to £25,000 and £125,000. With two, they fall to £16,667 and £83,333.
Profit in the band between the two limits is taxed at an effective marginal rate of 26.5%, so pushing profits into that band sooner costs real money.
What does it actually cost?
Take two companies, each making £50,000 of taxable profit.
On their own, each company pays 19% — £9,500.
As associated companies, each company’s limits are £25,000 and £125,000, so £50,000 falls into the marginal relief band. Each pays £11,375.
That’s £1,875 more per company, or £3,750 a year across the two — for exactly the same profits.
It grows with every company you add. Three associated companies each making £50,000 pay £12,000 each, against £9,500 standalone: £7,500 a year extra across the group.
Who counts as an associated company?
Two companies are associated if one controls the other, or if both are under the control of the same person or group of persons. What catches people out is how widely “control” is defined.
Control is wider than shareholding. It covers voting rights, rights to income, rights to assets on a winding up, and rights you’re entitled to acquire in future — including through loans and options.
Other people’s rights can be counted as yours. Rights held by a spouse or civil partner, close relatives and business partners can be attributed to you where there is substantial commercial interdependence between the companies — financial, economic or organisational links. A spouse’s company in a completely unrelated trade may not count; one that shares customers, staff, premises or funding with yours may well do.
“At any time” means any time. A company that is associated for just one day of the accounting period counts for the whole period. That includes companies bought, sold or set up part-way through the year.
Overseas companies count if they are under common control with your UK company.
Which companies don’t count?
Dormant companies — those that carried on no trade or business at any time in the accounting period — are left out.
Passive holding companies are also left out, but only if they meet strict conditions: broadly, they hold only shares in their subsidiaries, receive no income other than dividends that are passed on in full to their own shareholders, and claim no deductions. One stray receipt of bank interest, or one deductible expense, can bring them back into the count.
Is the count the same for quarterly instalment payments?
No — and this is a common error. Companies with profits over £1.5 million pay corporation tax in quarterly instalments. That £1.5 million threshold is divided by the number of “related 51% group companies”, which is a narrower, ownership-based test.
Two companies owned personally by the same individual are associated companies for the rate limits, but not related 51% group companies for instalments. Don’t assume one count answers both questions.
Can I split my business to stay under £50,000?
No. Fragmenting a business into several companies so that each stays under £50,000 simply divides the limits further. Every new company reduces the threshold for all the others. Note too that the limits are also reduced proportionately for a short accounting period.
What should I do before setting up another company?
Ask two questions first:
- Does this activity really need to be a separate company? There may be commercial reasons — ring-fencing risk, bringing in investors, a planned sale — but there may be none.
- What will it do to the group’s overall tax bill, including the companies you already have?
If you already run more than one company, check that each company’s corporation tax return shows the right number of associated companies. Getting it wrong on the CT600 can mean underpaid tax, plus interest and penalties when HMRC catches up.
If you haven’t reviewed this recently, it’s worth a conversation.
Frequently asked questions
How are corporation tax limits split between associated companies?
The £50,000 small profits limit and the £250,000 upper limit are divided by the total number of associated companies, including the company itself. With one associate, each company’s limits are £25,000 and £125,000; with two, £16,667 and £83,333. The limits are also reduced proportionately for accounting periods shorter than 12 months.
Does a company I set up part-way through the year count?
Yes. A company that is associated at any time during the accounting period counts for the whole period — including companies set up, bought or sold part-way through the year.
Do my spouse’s or family members’ companies count as associated?
They can. Rights held by a spouse or civil partner, close relatives and business partners can be attributed to you, but only where there is substantial commercial interdependence between the companies — financial, economic or organisational links. Each case turns on its facts.
Do dormant companies count as associated companies?
No. A company that carried on no trade or business at any time in the accounting period is disregarded. A passive holding company is also disregarded, but only if it meets strict conditions — any other income or deductible expense can bring it back in.
Is the associated company count used for quarterly instalment payments?
No. The £1.5 million quarterly instalment threshold is divided by the number of related 51% group companies, a narrower ownership-based test. Two companies owned by the same individual can be associated for the rate limits but not related 51% group companies for instalments.