If you run a limited company, you'll see "retained profit" sitting on your balance sheet every year, and it's easy to misread what it actually means. It isn't the cash in your bank account, and it isn't money waiting to be taxed again.
This guide explains what retained profit is, how to work it out, whether it's taxed, and how to manage it sensibly. It's written for UK limited company directors who want a clear answer without the jargon.
We've kept the figures to the 2025/26 tax year throughout, so everything below reflects current rates.
What is retained profit in simple terms?
Retained profit is the cumulative net profit your limited company has kept in the business, rather than paying it out to shareholders as dividends.
Think of it as your company's financial reservoir. After you've covered operating costs, paid your Corporation Tax bill, and distributed any dividends, whatever profit is left stays in the company. That figure builds up year after year.
You'll find it in the equity section of your balance sheet, alongside share capital. It's sometimes called "retained earnings", which means the same thing.
One point trips people up more than any other: retained profit is an accounting figure, not cash. The total can include the value of stock, equipment, or money customers still owe you. So a healthy retained profit line doesn't guarantee a healthy bank balance.
For directors, retained profit is useful capital. You can use it to buy equipment, hire staff, fund marketing, or simply hold a buffer for quieter trading periods.
If balance sheets are new to you, our statutory accounts service explains how each section fits together.
How do you calculate retained profit?
Calculating retained profit tracks your company's earnings after every obligation has been met. Here's the step-by-step method.
- Start with your opening balance. If you've traded before, begin with the retained profit brought forward from last year. For a brand-new company, this is zero.
- Add your net profit after tax for the year. That's your revenue, minus operating expenses, minus Corporation Tax.
- Subtract dividends paid. Take off any dividends paid to shareholders during the period.
- You're left with retained profit. That figure carries forward as your opening balance next year.
On the Corporation Tax step, the rate for the financial year from 1 April 2025 (FY2025) is 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief tapering the rate between those two limits (gov.uk).
You'll also want to keep an eye on cash separately, because retained profit and your bank balance aren't the same thing. Our bookkeeping service keeps both reconciled month to month.
What's the retained profit formula?
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The formula is short:
Retained profit = retained profit brought forward + net profit after tax − dividends paid
It works on an accruals basis, so it counts all income and costs for the period whether or not the cash has actually moved.
Illustrative example: one year of retained profit
This is a hypothetical company, used to show the maths. It is not a real client.
A limited company starts the year with £15,000 of retained profit brought forward. During the year it earns £80,000 in revenue and incurs £45,000 in operating expenses, giving £35,000 of profit before tax. Profits sit below £50,000, so Corporation Tax at 19% is £6,650. The director takes £10,000 in dividends.
| Item | Amount |
|---|---|
| Opening retained profit | £15,000 |
| Revenue | £80,000 |
| Less operating expenses | (£45,000) |
| Profit before tax | £35,000 |
| Less Corporation Tax at 19% | (£6,650) |
| Net profit after tax | £28,350 |
| Less dividends paid | (£10,000) |
| Retained profit carried forward | £33,350 |
So £15,000 + £28,350 − £10,000 = £33,350, which becomes next year's opening balance.
You can sense-check your own dividend position with our dividend tax calculator.
Is retained profit taxed?
This is the most common question we get on the topic, and the short answer is that retained profit is not taxed again simply for being retained.
The profit has already been through Corporation Tax. Keeping it in the company doesn't trigger a further charge. That's exactly why it's called retained profit and not retained revenue, the tax has already been settled.
Further tax only arises when you take money out. If you withdraw funds as dividends, you pay dividend tax personally. If you take them as salary, you pay Income Tax and National Insurance.
For 2025/26, dividends are taxed at the following rates above the £500 dividend allowance (gov.uk):
| Band | Dividend tax rate (2025/26) |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
Because the tax falls on withdrawal, timing matters. Spreading dividends across tax years, using your personal allowance, and balancing salary against dividends can all reduce your overall bill. This is where modelling with an accountant earns its keep, and it's part of our tax advisory service.
What's the difference between retained profit and reserves?
People use "retained profit" and "reserves" interchangeably, but they aren't quite the same thing.
Retained profit is one specific line on your balance sheet: the cumulative profit kept in the business after expenses, tax, and dividends. It forms part of shareholders' equity.
Reserves is the broader heading. It can also include the share premium account, a revaluation reserve, and a capital redemption reserve.
Distributable reserves are the profits you're legally allowed to pay out as dividends under the Companies Act 2006, broadly your accumulated realised profits less accumulated realised losses.
Here's a simple breakdown of a company's equity:
| Equity component | Amount | Distributable? |
|---|---|---|
| Share capital | £1,000 | No |
| Share premium | £9,000 | No |
| Retained profit | £50,000 | Yes |
| Total equity | £60,000 | n/a |
Only the £50,000 of retained profit is normally available to pay as dividends. The share capital and share premium are restricted and can't be distributed except through formal procedures such as a capital reduction.
What does company law say about paying dividends from retained profit?
UK company law is strict here, because dividend rules exist to protect creditors.
Under the Companies Act 2006, a company can only pay dividends out of distributable profits (legislation.gov.uk). For most private companies that means your accumulated realised profits, less accumulated realised losses, in other words your retained profit.
A few rules follow from that:
- You need enough distributable reserves. Pay a dividend the company can't cover and it's an unlawful dividend, which directors can be made to repay.
- Base it on proper accounts. Dividend decisions should rest on accounts that actually show sufficient reserves, whether your last annual accounts or interim management accounts.
- Document board approval. Directors should formally approve dividends and minute the decision.
- Never pay from capital. Share capital and share premium aren't available for ordinary dividends.
The traps we see most often are confusing cash with profit (cash from a loan or VAT collected isn't profit), ignoring losses brought forward, and paying regular "dividends" without ever checking the reserves exist. Taking out more than salary, dividends, and legitimate expenses can also create an overdrawn director's loan account with its own tax consequences.
For HMRC's plain-English version of how to take money out properly, see the gov.uk guide on running a limited company.
How should you manage your retained profit?
Good retained profit management balances three things: business security, growth plans, and your own income needs. A few practical habits help.
Track it regularly. Check your balance sheet monthly so you can see the trend, not just the year-end snapshot.
Decide on a retention approach. Many directors hold back a set share of monthly profit rather than deciding everything at year end. The right level depends on your stage and risk appetite, a fast-growing business will usually retain more than a mature, steady one.
Tie it to a goal. Reserves work best with a purpose: a known equipment purchase, an emergency fund of three to six months' costs, or capital for expansion.
Reinvest where it earns a return. Equipment, hiring, training, or product development all count, as long as the spend generates value rather than just using up the balance.
Set a dividend policy. A clear policy on how much to retain versus distribute keeps decisions consistent and avoids reactive, cash-driven moves.
Review it annually. Tax rules and your circumstances change, so revisit the plan each year. An annual review with an accountant keeps both your company and personal tax positions efficient.
Want help building a retention and dividend plan that fits your company? Book a free 20-minute call with a Zmartly accountant and we'll model the numbers with you.
Does retained profit apply to sole traders?
Not in the same way. Retained profit is a limited company concept.
As a sole trader, you and your business are the same legal entity, so there's no separate company to retain profit in. Your business profit is simply your taxable income, taxed through Self Assessment via Income Tax and National Insurance.
That said, the underlying discipline still matters. Even without a formal retained profit line, you should keep cash reserves for quiet periods, set money aside for your tax bill, and hold a buffer for unexpected costs.
If the benefits of a company, such as keeping post-tax profit inside the business and clearer separation between business and personal finances, start to appeal, it may be worth weighing up incorporation. Our self-assessment service can help you decide, and we work with sole traders and limited companies alike.
Frequently asked questions
What is retained profit in business? Retained profit is the cumulative net profit a limited company has kept after paying all expenses, Corporation Tax, and shareholder dividends. It appears on the balance sheet within shareholders' equity and represents funds available for reinvestment or future distribution.
Is retained profit internal or external finance? It's internal finance. It comes from profitable trading within the business, as opposed to external sources such as bank loans, overdrafts, or investor funding.
What's the difference between retained profit and cash in the bank? Retained profit is an accounting figure for cumulative profit kept in the business. Cash in the bank is actual liquid money. Retained profit can include non-cash items like stock, equipment, or unpaid invoices, so a high retained profit doesn't always mean a high cash balance. Monitor both.
Can you pay dividends if you have no retained profit? No. The Companies Act 2006 requires sufficient distributable reserves, which for most private companies means retained profit, before you can pay a dividend. Paying without adequate reserves is an unlawful dividend, and directors can be made to repay it.
Is retained profit taxed again when I keep it in the company? No. The profit has already been through Corporation Tax. Keeping it in the company triggers no further tax. Personal tax only arises when you withdraw funds, as dividends (taxed at 8.75%, 33.75%, or 39.35% above the £500 allowance for 2025/26) or as salary (Income Tax and National Insurance).
What happens to retained profit if a solvent company closes? In a Members' Voluntary Liquidation, retained profit left after settling all liabilities is distributed to shareholders, usually as a capital distribution for tax. If the conditions are met, this can qualify for Business Asset Disposal Relief, charged at 14% for qualifying disposals on or after 6 April 2025.
