Second company corporation tax

Opening a second company can feel like a sensible next step.

You might be launching a new brand, separating different income streams, bringing in a business partner, starting a property company, or creating a new company for a fresh venture. From a commercial point of view, there can be good reasons to use more than one limited company. However, there is a Corporation Tax issue that many directors do not spot until it is too late.

If your companies are treated as associated companies, the Corporation Tax thresholds can be split between them. This means your company could move into the higher Corporation Tax bands much earlier than expected.

For owner managed businesses and fast growth start-ups, this can create a genuine tax surprise.

How Corporation Tax usually works for one company

For a standalone limited company, Corporation Tax is currently based on profit levels.

Broadly:

Companies with profits up to £50,000 may qualify for the 19% small profits rate.

Companies with profits above £250,000 generally pay Corporation Tax at the 25% main rate.

Companies with profits between £50,000 and £250,000 may be eligible for marginal relief, which gradually increases the effective Corporation Tax rate. The 19% small profits rate applies to companies with profits of £50,000 or less, while the main rate applies above £250,000, with marginal relief applying between those limits.

So, if you have one company making £45,000 profit, the Corporation Tax position may feel straightforward. The company is within the small profits limit but the position can change when you open another company.

What happens when you open a second company?

The key issue is whether the companies are associated. Where a company has one or more associated companies, HMRC guidance says the upper and lower Corporation Tax limits are divided by the total number of associated companies, including the company itself.

This is the part that can catch business owners out-

If you have one company, the small profits limit is usually £50,000.

If you have two associated companies, that £50,000 limit is divided by two.

This means each company has a small profits limit of £25,000, not £50,000.

The upper limit is also divided. So instead of the 25% main rate applying above £250,000, the upper limit for each company becomes £125,000.

In simple terms, a second associated company can reduce the Corporation Tax thresholds for each company.

Second company Corporation Tax example

Let’s look at a simple example-

Imagine a director owns Company A.

Company A makes £45,000 profit.

If Company A is the director’s only company, it may fall within the £50,000 small profits limit and qualify for the 19% small profits rate.

Now imagine the same director opens Company B, and the two companies are associated.

The lower limit is now divided between the two companies.

That means Company A’s lower limit is no longer £50,000. It is £25,000.

So, if Company A still makes £45,000 profit, it is now above its reduced lower limit. The company may be pulled into the marginal relief band, even though its profits have not changed.

That is the tax surprise.

The business owner may have opened a second company for perfectly valid commercial reasons, but the Corporation Tax position of the first company may have changed as a result.

The five company example

The impact becomes even clearer when there are several companies. If a business owner has five associated companies, the £50,000 lower limit is divided by five. That means the small profits limit for each company is only £10,000.

In that situation, if one of the companies makes more than £10,000 profit, it may already be above its reduced lower limit and into the marginal relief band.

The £250,000 upper limit is also divided by five, meaning the upper limit for each company becomes £50,000.

So, with five associated companies, the Corporation Tax bands are compressed significantly.

This does not mean that opening several companies is always wrong. It does mean that the tax position needs to be reviewed before the structure is created.

What is an associated company?

A company may be associated with another company where one controls the other, or where both are under the control of the same person or people.

For many owner managed businesses, this can be relevant where the same individual, spouse, family members, or business partners have control or influence over more than one company.

The rules can be more complex than many directors expect. HMRC guidance includes areas such as control, attribution of rights, and commercial interdependence between companies.

For example, HMRC may look at whether companies are linked financially, economically or organisationally. This could include shared customers, shared premises, shared staff, shared funding, or one company relying heavily on another. HMRC guidance refers to substantial commercial interdependence when considering certain associated company situations.

This is why it is important not to assume that a company is completely separate for Corporation Tax purposes just because it has a different name, bank account or Companies House number.

Does a dormant company count?

Not always.

HMRC guidance states that an associated company which has not carried on any trade or business during the accounting period may be disregarded for these purposes.

This can be helpful, but it should not be guessed. A company that looks inactive from the outside may still have activity that needs to be reviewed.

If you have dormant companies, investment companies, property companies, holding companies, or companies that have only traded for part of the year, it is worth checking the position carefully.

Why this matters for business owners

This issue matters because it can affect your tax bill before you realise there is a problem.

A director might think:

“My company only made £40,000 profit, so it should be taxed at 19%.”

But if the company is associated with another company, the relevant threshold might not be £50,000. It might be £25,000, £16,667, £10,000, or another reduced amount depending on the number of associated companies.

That means the company could pay more Corporation Tax than expected.

This can also affect cash flow planning. If you are setting aside money for tax based on the wrong assumption, the final Corporation Tax bill may be higher than planned.

For fast growth businesses, this is especially important. Group structures, new ventures and separate trading companies can be useful, but they should be created with full visibility over the tax consequences.

When a second company can still make sense

Opening a second company is not automatically a bad idea.

There may be good reasons to do it, including:

• Separating risk between different trades
• Creating a new brand
• Bringing in different shareholders
• Protecting assets
• Preparing for investment or sale
• Managing different types of activity

However, the decision should be based on both commercial and tax advice. The question is not simply “Can we open another company?” The better question is “What will this structure mean for tax, admin, reporting, cash flow and future plans?”

A second company can add extra complexity, including separate accounts, separate Corporation Tax returns, payroll considerations, VAT considerations, bookkeeping, Companies House filings, and potentially more detailed tax planning. The Corporation Tax threshold issue is just one part of the wider picture.

How to avoid a Corporation Tax surprise

Before opening a second company, directors should take advice on:

• Whether the companies are likely to be associated
• How the Corporation Tax thresholds will be split
• Whether marginal relief may apply
• How much Corporation Tax should be set aside
• Whether the structure is commercially justified
• Whether there are simpler alternatives
• How the structure fits future growth, funding or exit plans

It is also worth reviewing existing company structures. Some business owners already have more than one company and may not realise the thresholds should be divided.

If you have opened a second company recently, or you are thinking about doing so, this is a sensible time to review the tax position.

Speak to AGILE Accountants before opening a second company

If you are thinking about opening a second company, we can help you understand the Corporation Tax impact before you make the move.

We can review your structure, explain whether associated company rules may apply, estimate the likely tax impact, and help you plan properly.

A second company can be the right decision, but it should not come with an unexpected Corporation Tax bill.

Speak to AGILE Accountants today if you are considering a new company structure or want to review your existing companies.