Of everything that decides a small company's corporation tax rate, the associated companies count is the one most often got wrong and the one with the largest effect. It does not change the rate and it does not change the profit. It changes the thresholds those two are compared against, by division, and a company that controls three others reaches the main rate at a quarter of the profit it otherwise would.
What the rule does
GOV.UK puts it plainly: the £50,000 and £250,000 profit thresholds are proportionately reduced for short accounting periods and by the total number of associated companies your company has. The division is by the count of associated companies plus the company itself. HMRC's published example takes a company with three other associated companies, divides the limits by four, and arrives at a lower limit of £12,500 and an upper limit of £62,500. At those limits a profit of £70,000 is charged entirely at the main rate, where a standalone company making the same profit would be in the relief band.
What makes a company associated
Association turns on control, not on shareholding percentage alone and not on trading relationship. One company is associated with another if one controls the other, or if both are under the control of the same person or persons. Control is a defined concept that looks at share capital, voting power, entitlement to income on a distribution and entitlement to assets on a winding up, and a person's rights can be attributed from their associates. Dormant companies are excluded, and so are companies that are not carrying on a business, which is why a genuinely dormant holding company usually does not count.
Why it is worth counting properly
The rule bites hardest on the group of small companies owned by the same family or the same founder, which is precisely the structure that tends not to think of itself as a group. Two people who each hold a personal service company and jointly own a property company have an associated companies question, and the answer changes both companies' rates. The count is made for the accounting period, so a company acquired or sold part way through affects only the part of the period it was associated for. Get the count wrong downwards and the return understates the tax; get it wrong upwards and the company pays more than it owes.
Questions people ask about associated companies
How do associated companies affect corporation tax?
They divide the £50,000 and £250,000 thresholds. With three other associated companies the limits are divided by four and become £12,500 and £62,500, so the main rate arrives at a much lower profit.
Do dormant companies count as associated?
No. A company that is dormant, or that is not carrying on a business at any time in the accounting period, is left out of the count. A holding company doing nothing but holding shares is often in this position, though it depends on the facts.
Is association about ownership or control?
Control. One company is associated with another where one controls the other, or where both are controlled by the same person or persons, with control measured by share capital, voting power, income entitlement and assets on a winding up.