Running a group
Does adding a holding company push up your corporation tax?
A holding company halves the small profits and marginal relief limits unless it is passive. Worked examples at 2026/27 rates and the s18F passive test.
By Omar Aswat CTA ·
One of the first questions owners ask about a holding company is whether it will cost them more corporation tax. The honest answer is: sometimes, a little, and it's easy to work out.
The reason is the associated companies rule. Here's how it works, what it costs at 2026/27 rates, and when a holding company escapes it.
The rates and the limits
For the financial year starting 1 April 2026:
- profits up to £50,000 are taxed at the small profits rate of 19%;
- profits over £250,000 are taxed at the main rate of 25%;
- in between, marginal relief applies, using a standard fraction of 3/200, giving an effective marginal rate of 26.5% on profits in the band.
Those £50,000 and £250,000 limits are divided by the number of associated companies plus one (CTA 2010 s18D). Two companies are associated if one controls the other, or both are controlled by the same person or persons, at any time in the accounting period (s18E).
A holding company controls its subsidiary. So, as a rule, inserting a holding company over a single trading company halves the limits to £25,000 and £125,000.
The formula
Where a company's profits fall between the limits, its corporation tax is:
25% of profits, less 3/200 x (upper limit - profits)
This assumes the company has no dividends from outside its group adding to its "augmented profits". Dividends from a 51% subsidiary are excluded from augmented profits (s18L), so dividends flowing up to HoldCo don't affect HoldCo's own rate.
Worked examples: one trading company
These are illustrations, not client examples. TradeCo has a 12-month accounting period in the financial year 2026.
Profits of £100,000
| Standalone | With a holding company (limits halved) | |
|---|---|---|
| Limits | £50,000 / £250,000 | £25,000 / £125,000 |
| 25% x £100,000 | £25,000 | £25,000 |
| Marginal relief: 3/200 x (upper limit - £100,000) | 3/200 x £150,000 = £2,250 | 3/200 x £25,000 = £375 |
| Corporation tax | £22,750 | £24,625 |
| Extra cost | £1,875 |
Across a range of profits
| TradeCo profits | Tax standalone | Tax with an associated holdco | Extra cost |
|---|---|---|---|
| £25,000 | £4,750 | £4,750 | £0 |
| £40,000 | £7,600 | £8,725 | £1,125 |
| £50,000 | £9,500 | £11,375 | £1,875 |
| £100,000 | £22,750 | £24,625 | £1,875 |
| £125,000 | £29,375 | £31,250 | £1,875 |
| £150,000 | £36,000 | £37,500 | £1,500 |
| £200,000 | £49,250 | £50,000 | £750 |
| £250,000+ | 25% | 25% | £0 |
The pattern is simple. With one associated company, the extra cost never exceeds £1,875 a year. It's at its maximum for profits between £50,000 and £125,000, tapers to nil at £250,000, and falls away below £50,000 to nil at £25,000. For a trading company already paying 25% on everything, a holding company costs nothing in rate terms.
Try your own figures with the associated companies calculator.
Worked example: two trading companies
Suppose you own TradeCo A and TradeCo B directly, each making £100,000. They're under common control, so they're already associated: each has limits of £25,000 and £125,000 and pays £24,625.
Now put a holding company over both (see a holding company over two companies):
| Passive holdco (not counted) | Active holdco (counted) | |
|---|---|---|
| Associated companies for each trading company | 1 | 2 |
| Limits | £25,000 / £125,000 | £16,667 / £83,333 |
| Tax for each company on £100,000 | £24,625 | £25,000 (all above the upper limit) |
| Total for both | £49,250 | £50,000 |
The extra cost of an active holding company here is £750 a year across the group.
The passive holding company exception
A holding company is ignored for these purposes if it counts as not carrying on a business under CTA 2010 s18F. That applies where, throughout the accounting period, the holding company:
- has no assets other than shares in its 51% subsidiaries;
- has no income other than dividends;
- pays out to its own shareholders at least the dividends it receives, and those dividends are exempt distributions;
- has no chargeable gains;
- has no management expenses referable to the period;
- has no qualifying charitable donations deducted.
That's a strict list. In practice a holding company fails it if it:
- keeps any cash of its own, even a small bank balance earning interest;
- charges management fees to subsidiaries;
- pays its own costs, such as accountancy or bank charges, as management expenses;
- holds property or investments;
- retains dividends instead of passing them all on to shareholders.
A genuinely dormant company is also disregarded, because an associated company that carried on no trade or business in the period doesn't count (s18E(4)-(5)).
Why most holding companies aren't passive, and that's fine
The commonest reason for a holding company is to keep surplus cash away from the trading company's risks. Profits move up as exempt dividends and stay in HoldCo. That breaches conditions 1 to 3 straight away.
So most useful holding companies are associated companies. The question is whether the benefit is worth up to £1,875 a year per trading company. For a business with £1m of cash at risk in a trading company, or a second business that needs funding from tax-free dividends, it almost always is.
Where a holding company is purely there to own the shares, for example during succession planning, it can be worth keeping it passive. Pay its few costs from the subsidiary where appropriate, keep no cash in it, and pass dividends straight through.
What about the holding company's own tax?
HoldCo pays corporation tax only on its taxable profits: typically bank interest on cash it holds, rent if it owns property, or management charges. Its exempt dividends from TradeCo don't count.
Suppose HoldCo earns £10,000 of interest on cash it has protected. With one associated company, its own lower limit is £25,000, so the interest is still taxed at 19%, which is £1,900, the same as if the limits weren't divided. Only if HoldCo's taxable profits rose above £25,000 would the halved limits start to bite on HoldCo itself.
So for a typical group, the whole associated companies cost sits in TradeCo, and it's the figure in the tables above.
Practical points
- Part periods count. A holding company inserted partway through the year is associated for the whole period.
- Short periods. If an accounting period is shorter than 12 months, the limits are reduced proportionately as well as divided.
- Each company has its own limits. HoldCo itself, if it has taxable interest or rent, also uses the divided limits.
- Close investment-holding companies. A holding company of trading subsidiaries is not a close investment-holding company, so it can use the small profits rate on its own taxable profits. One that mainly holds portfolio investments is, and pays 25% on everything.
For the full rules, see associated companies. If you're weighing up a holding company, our holding company calculator puts the associated companies cost alongside the benefits. Or book a call; we respond the same working day.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
