Do subsidiary companies pay corporation tax? A two-company group worked through

Yes. Every UK company in a group, including each subsidiary and the holding company, is a separate taxpayer and pays corporation tax on its own profits. A group doesn't file one combined return. But the group can share losses through group relief, and dividends paid up from a subsidiary to the holding company are normally exempt from corporation tax.

This article shows how those rules fit together, using a simple two-company example.

Each company stands alone

For corporation tax, each company has:

• its own accounting period;
• its own company tax return, with its own profits computed;
• its own corporation tax payment date and bill.

So when we talk about a "group", we mean a set of separate companies that can use certain reliefs together, not a single taxpayer. A subsidiary's profit is taxed in the subsidiary, a holding company's profit in the holding company.

The rates, and what a group does to them

For the financial year starting 1 April 2026, the small profits rate is 19% on profits up to £50,000 and the main rate is 25% on profits above £250,000. Between the two, marginal relief applies: tax is 25% of profits less 3/200 of the amount by which the upper limit exceeds profits.

Those limits are divided by one plus the number of associated companies. 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. A holding company usually controls its subsidiary, so in a two-company group each company's limits are £25,000 and £125,000. See associated companies for the details and the exception for a purely passive holding company, and the associated companies calculator to test your own figures.

A worked example

This is an illustration, not a client example. HoldCo owns 100% of TradeCo. HoldCo is associated with TradeCo because it keeps its dividend income, and it incurs management expenses (audit, filing and admin costs) of £8,000 in the year. It has no profits of its own. TradeCo has taxable profits of £100,000 before any group relief. Both have 12-month accounting periods in the financial year 2026.

Step 1: no group relief

HoldCo's £8,000 of expenses give it no immediate benefit.

Step 2: group relief

Management expenses are one of the amounts that can be surrendered to the extent they exceed the surrendering company's own profits. Here the excess is the whole £8,000. HoldCo surrenders it to TradeCo, and TradeCo claims it in its return.

Group relief saves £2,120 (£24,625 less £22,505). Both companies must be in the same 75% group for the overlapping period, and the surrender and claim have to be made on time.

Step 3: moving cash up

TradeCo pays HoldCo a £60,000 dividend. Under Part 9A of the Corporation Tax Act 2009, a dividend received from a company the recipient controls is exempt. No corporation tax is due on it in HoldCo, and it doesn't count towards HoldCo's augmented profits for the rate bands, because dividends from a 51% subsidiary are left out. TradeCo gets no deduction for it, because it is a distribution, not an expense.

What group relief can and can't do

• Qualifying companies: group relief needs a 75% relationship, plus 75% of the distributable profits and of the assets on a winding up.
• Losses you can surrender: trading losses, excess capital allowances and non-trading loan relationship deficits in full. UK property business losses, management expenses and certain others only to the extent they exceed the company's own profits.
• Capital losses can't be surrendered. Companies in a capital gains group can instead use an election under section 171A of the Taxation of Chargeable Gains Act 1992 to treat a gain or loss as made by another member.
• Same period only: relief is limited to the time the two companies' accounting periods overlap and they are grouped.

See group relief and capital gains groups for the full set of rules, including what happens when a company leaves the group.

Points to watch

• Check who is associated. A company controlled by you personally is associated with the group, whether or not it is a subsidiary.
• The cost lands where the profit is. In most groups the trading company bears the effect of halved limits.
• Dividends don't move losses. Only group relief shares losses. A dividend moves cash, not tax relief.
• Shorter periods. If a company's accounting period is shorter than twelve months, the limits are scaled down.

Dividends from the holding company to you are taxed as dividends in the usual way. See dividends and extracting profit for the 2026/27 rates and an example.

What this means in practice

Each year, your accountant prepares a return for every company in the group. The returns state how many associated companies each has, and the figures flow from there. Group relief claims need to match: one company surrenders, the other claims, for the same period. It helps to agree the figures before either return is filed, because the amounts must tally.

If you are planning a new venture, a subsidiary is useful where you expect start-up losses, because those losses can reduce the established company's profit through group relief. But each additional company in the group, including a company you own personally, can divide the corporation tax limits further. We can model it with you in the associated companies calculator before you commit.

Talk to us

If you want to check how corporation tax works across your own group, or whether a holding company would change it, 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.