Written and reviewed by James Whitfield · Updated for 2026/27 · Editorial standards · Methodology
Retained profit is money left in your limited company after all taxes and distributions. It belongs to the company, not to you personally. This guide explains how retained profit works, what tax applies when you eventually extract it, and common strategies.
Retained profit (or retained earnings) is the cumulative total of after-tax profit that your company has not paid out as dividends. After the company pays corporation tax, any remaining profit can either be paid to shareholders as a dividend or kept in the company as retained profit. Retained profit shows up on the company's balance sheet under shareholders' equity.
It is important to understand that retained profit belongs to the company, not to you personally. You cannot simply transfer it to your personal bank account without triggering a taxable event. You can pay it out as a dividend, extract it as salary (creating NI and income tax implications), or leave it in the company.
Retained profit is not taxed again just for sitting in the company. Once corporation tax has been paid, the company can hold the remaining cash indefinitely. The tax question arises when you eventually want to access it personally.
The most common way to extract retained profit is as a dividend. Dividends are paid from post-corporation-tax profit (whether current-year or accumulated retained profit) and are taxed in the recipient's hands at dividend tax rates: 10.75% (basic rate), 35.75% (higher rate) or 39.35% (additional rate), above the £500 annual dividend allowance.
The combined effect of corporation tax already paid plus dividend tax on extraction means the effective combined rate varies. At the small profits rate (19%) and basic-rate dividend tax (10.75%): if the company makes £1 of profit, it pays 19p corporation tax, leaving 81p. The director then pays 10.75% of 81p = 8.7p dividend tax. Total tax on £1 = 27.7p, effective rate 27.7%.
At the 25% main rate and higher-rate dividend tax: £1 of profit → 25p corporation tax → 75p post-tax → 35.75% × 75p = 26.8p dividend tax → total 51.8p. The retained profit that escapes the current year can therefore be worth more if extracted in a lower-income year (such as a year when the director takes no other income).
Timing distributions: If you expect lower personal income in future years (after retirement, part-time work, or selling the company), extracting retained profit in those years means it is taxed at the basic rather than higher rate. Keeping profit in the company now at 19% corporation tax and extracting it later at 10.75% dividend tax gives a combined rate of 27.7%, which many directors find acceptable.
Company pension contributions: Using retained profit to fund director pension contributions reduces future distributable profit and builds your pension simultaneously. Company pension contributions are deductible in the year paid. They do not appear as personal income for tax or NI purposes. This is one of the most tax-efficient uses of company cash.
Capital on closure: When a company is closed (liquidated), the remaining distributable reserves may qualify for Business Asset Disposal Relief (BADR, formerly Entrepreneurs' Relief), taxed as a capital gain at 10% on gains within the lifetime limit, subject to qualifying conditions. This is significantly lower than dividend tax rates, which is why some directors deliberately build retained profit with a view to a final extraction on closure.
Reinvestment and assets: Companies can also use retained profit to purchase business assets, invest in other companies, or buy property — though each of these has its own tax implications that are outside the scope of a calculator estimate.
Corporation tax is paid on the profit before it is retained. The retained profit itself is not taxed again while sitting in the company. Tax arises when you extract it — typically as dividends.
Yes. Company pension contributions come from company funds (which can include retained profit) and are deductible for corporation tax. They do not trigger NI or income tax in the year of payment.
On a formal liquidation, retained profit is distributed to shareholders. The distribution may qualify as a capital gain rather than a dividend, and Business Asset Disposal Relief (BADR) may apply at 10% — subject to meeting qualifying conditions and lifetime limits.
No. Retained profit belongs to the company, not to you personally. It does not appear on your Self Assessment return until you extract it as a dividend or salary.