How do related 51% group companies affect the corporation tax rate?

How Related 51% Group Companies Affect the Corporation Tax Rate

What the law says

The corporation tax rate structure (from 1 April 2023) distinguishes between the 19% small profits rate, the 25% main rate, and a marginal relief band in between. The thresholds that determine which rate applies are directly reduced by the number of related 51% group companies.

The core mechanism — CTA 2010, s.18D (Part 3A):

Where a company has one or more associated companies in an accounting period, the lower and upper limits are divided by (1 + N), where N is the number of associated companies:

The practical effect is:

• If augmented profits ≤ lower limit → taxed at the 19% small profits rate (CTA 2010, s.18A)
• If augmented profits > lower limit but ≤ upper limit → marginal relief applies, reducing the effective rate between 19% and 25% (CTA 2010, s.18B)
• If augmented profits > upper limit → taxed at the 25% main rate

The marginal relief formula under s.18B is: F × (U − A) × N/A, where F is the standard marginal relief fraction (3/200ths), U is the upper limit, A is augmented profits, and N is taxable total profits.

Definition of "associated company" (CTA 2010, s.18E): A company is an associated company if, at any time in the accounting period, one has control of the other, or both are under the control of the same person or persons. An associated company is ignored if it has not carried on a trade or business at any time in the relevant part of the accounting period.

Short accounting periods: The lower and upper limits are proportionately reduced for accounting periods of less than 12 months.

Impact on instalment payments (large company threshold): The same principle applies to quarterly instalment payments. Where a company has N related 51% group companies, the £1,500,000 "large company" profits threshold is reduced to £1,500,000 ÷ (1+N), and the £10,000,000 "very large company" threshold becomes £10,000,000 ÷ (1+N).

HMRC guidance / practice

HMRC confirms that when a company has associated companies (or, for accounting periods beginning between 1 April 2015 and 31 March 2023, 51% group companies), the upper limit is reduced by dividing by the number of associated/group companies.

HMRC's Company Taxation Manual illustrates the practical effect with worked examples. For instance, where a company has one associated company for part of an accounting period, the lower and upper limits are halved (divided by 1+1=2), meaning a company with profits that would otherwise fall below the lower limit may instead fall within the marginal relief band or even above the upper limit, increasing its effective tax rate.

Summary

The key practical consequence is straightforward: every additional related 51% group company compresses the thresholds, making it harder for any individual group company to qualify for the 19% small profits rate or marginal relief. A company with just one related 51% group company sees its upper limit halved from £250,000 to £125,000; with four such companies, the upper limit falls to just £50,000. Companies above the (reduced) upper limit pay the full 25% main rate.