Associated Companies, Capital Allowances and the 26.5% Band
Rugwise Ltd makes and sells industrial fittings and has a 31 March 2025 year end. Profits before capital allowances are £100,000. In the year it bought £22,000 of plant and machinery, plus a car with CO2 emissions of 45g/km for £18,000, both brought into use on 1 August 2024. Bert owns 60% of Rugwise; he also owns 100% of Aldermere Ltd, which has traded throughout, and 100% of Baytree Ltd, which has been dormant since incorporation. Bert tells you the limits are "divided by three because I have three companies". Next year's profits before capital allowances are forecast at £140,000 with no further purchases planned.
1. Determine the number of associated companies and the profit limits that apply to Rugwise Ltd for the year ended 31 March 2025.
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Test for association
Two companies are associated if one controls the other, or both are under the control of the same person or persons. Bert controls Rugwise (60%), Aldermere (100%) and Baytree (100%), so prima facie all three are associated.
The dormant exclusion
A company is not an associated company in an accounting period if it has not carried on a trade or business at any time in that period. Baytree has been dormant since incorporation, so it is ignored.
Count
- Rugwise itself: 1
- Aldermere: 1
- Baytree: 0
Total = 2 companies, so the statutory limits are divided by 2, not 3:
- Lower limit: £50,000 ÷ 2 = £25,000
- Upper limit: £250,000 ÷ 2 = £125,000
Bert's mental arithmetic is wrong in both directions - he has overstated the divisor and so understated the thresholds. This matters because a company below £25,000 pays 19% flat, and a company between £25,000 and £125,000 pays 25% less marginal relief.
2. Compute Rugwise's capital allowances and corporation tax liability for the year ended 31 March 2025.
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Capital allowances
Plant and machinery, £22,000
Qualifying plant is eligible for the annual investment allowance (AIA), which for a 12-month period from April 2024 is £1,000,000 - far above this spend. AIA is a claim, not an automatic entitlement, so the claim must actually be made: £22,000.
Car, 45g/km, £18,000
Cars are excluded from the AIA. The pool depends on emissions:
- new zero-emission cars → 100% first-year allowance;
- cars with emissions above 0 and up to 50g/km → main pool at 18%;
- cars above 50g/km → special rate pool at 6%.
At 45g/km the car goes into the main pool: 18% × 18,000 = £3,240 (full year's allowance, no reduction for an August purchase).
Total allowances = 22,000 + 3,240 = £25,240.
Taxable total profits
100,000 − 25,240 = £74,760
Corporation tax
£74,760 sits between £25,000 and £125,000, so main rate applies less marginal relief. With no exempt distributions, N = A:
- Tax at 25%: 74,760 × 25% = £18,690
- Marginal relief: (125,000 − 74,760) × 3/200 = 50,240 × 0.015 = £753.60
- Liability: £17,936.40 (effective rate ≈ 24.0%)
Note that if the car had been over 50g/km, the allowance would have been £1,080 and profits £76,920 - the answer turns entirely on the emissions boundary.
3. Bert can delay the £22,000 plant purchase into the next year, when profits are forecast at £140,000. Advise, with figures, whether to buy now or later.
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The marginal rate inside the band
Between £25,000 and £125,000 of profits the effective marginal rate is 26.5%: every extra £1 of profit is taxed at 25% and simultaneously withdraws 1.5p of marginal relief.
Buy now
- Tax with the plant: £17,936.40 (computed above)
- Tax without the plant (profits 100,000 − 3,240 = 96,760):
- 96,760 × 25% = 24,190
- less (125,000 − 96,760) × 0.015 = 423.60
- = £23,766.40
- Saving = 23,766.40 − 17,936.40 = £5,830 = 22,000 × 26.5%. ✔
Buy next year
Next year's profits of £140,000 exceed the £125,000 upper limit, so the whole profit is taxed at the 25% main rate. Deferring the AIA claim gives relief worth 22,000 × 25% = £5,500.
Conclusion
Buying now is worth about £330 more in tax terms. Two caveats:
- £330 is small; the commercial need for the asset and its cash-flow cost should drive the decision, not the tax.
- The AIA is not "use it or lose it" - unused AIA does not expire - so the only real question is which year's rate applies to the deduction. If next year's forecast were to fall into the band rather than above it, the comparison would reverse, so the forecast should be stress-tested before timing the purchase.