Understanding Associated Companies and Corporation Tax: A Guide for Our Clients

Introduction For many businesses, understanding tax obligations is crucial. One important concept is the impact of associated companies on corporation tax rates. This blog will explain what associated companies are and how they affect your tax calculations, with a clear example to illustrate these rules in action.

What are Associated Companies? Associated companies are those that share control, either because one company controls another, or they are both controlled by the same individual or entity. Control can be defined through share capital, voting power, or rights to income/assets.

Tax Implications When companies are associated, they must share corporation tax thresholds, impacting the rate they pay. Here’s how corporation tax rates work:

• Profits up to £50,000: 19%

• Profits between £50,001 and £250,000: Marginal relief

• Profits over £250,000: 25%

Example in Action

Scenario:

• Company X and Company Y are controlled by the same individual.

• Each company earns £60,000 in taxable profits.

Combined Profits:

• Total profits: £60,000 (Company X) + £60,000 (Company Y) = £120,000

Threshold Division:

• The thresholds are divided by the number of associated companies (2 in this case).

  • Lower threshold: £50,000 / 2 = £25,000

  • Upper threshold: £250,000 / 2 = £125,000

Tax Calculation:

• Company X:

  • Profits up to £25,000 taxed at 19%: £25,000 * 19% = £4,750

  • Remaining £35,000 taxed at marginal rate (between £25,001 and £125,000).

• Company Y:

  • Profits up to £25,000 taxed at 19%: £25,000 * 19% = £4,750

  • Remaining £35,000 taxed at marginal rate (between £25,001 and £125,000).

Because they are associated, the shared thresholds affect the rate of tax they pay, ensuring no unfair benefit from splitting profits.

What You Need to Do To accurately calculate your corporation tax, it's essential to confirm the number of associated companies you have. This will ensure you apply the correct tax rates and comply with HMRC regulations.

For more detailed information, you can read the original ACCA article.

Feel free to reach out to our team for personalised advice on managing your corporation tax effectively.