What is Retained Profit?
Retained profit is the money your company keeps after paying all expenses, taxes, and dividends. It's the company's accumulated savings.
Example
Company makes £50k profit, pays £12.5k tax, takes £20k dividend. Retained profit = £17.5k stays in the company.
Key Dates
Shown on balance sheet at year end
How Retained Profit Works in Practice
Retained profit, also called retained earnings or accumulated profit, is the total profit your company has earned since it started trading, minus all Corporation Tax paid and all dividends distributed to shareholders. It represents the wealth the company has built up and kept internally rather than distributing to its owners.
On the balance sheet, retained profit sits within shareholders' equity (also called shareholders' funds or capital and reserves). It is the main component that grows over time as your company trades profitably. A healthy retained profit figure indicates the company is generating more than it is distributing, which is important for financial stability, investment, and creditworthiness.
Retained profit is critical because it determines how much you can legally pay out as dividends. Under the Companies Act 2006, dividends can only be paid from distributable profits, which are essentially accumulated realised profits minus accumulated realised losses. If your company has made losses in previous years, those losses reduce the pool of distributable profits even if the current year is profitable.
Directors often confuse their bank balance with retained profit. They are not the same thing. Your bank account might show £50,000, but if you owe £30,000 in Corporation Tax and have £10,000 in unpaid supplier invoices, your cash available for dividends is much less than £50,000. Conversely, your retained profits might be higher than your bank balance if you have money tied up in assets or receivables.
Step by Step
Retained profit accumulates automatically as your company trades. At the end of each accounting period, the profit after tax is added to the opening retained profit balance. Any dividends paid during the period are deducted. The resulting figure becomes the closing retained profit, which carries forward as the opening balance for the next period.
For example, if your company starts the year with £30,000 retained profit, makes £40,000 profit after tax during the year, and pays £25,000 in dividends, the closing retained profit is £30,000 + £40,000 - £25,000 = £45,000.
When reviewing whether you can pay a dividend, you look at the retained profit figure in your most recent management accounts or statutory accounts. If the figure is positive, dividends can be paid up to that amount (subject to having sufficient cash). If retained profit is negative (accumulated losses), no dividends can be paid until the company returns to a cumulative profit position.
Practical Tips
- Review your retained profit figure in management accounts before declaring any dividend, not just your bank balance
- Maintain a buffer of retained profit in the company to cover unexpected expenses, tax bills, or slow trading periods
- If your company has accumulated losses, track when retained profit turns positive so you know when dividends become available again
- Ask your accountant to prepare a simple distributable profit calculation at least quarterly so you always know how much is available for dividends
Common Mistakes to Avoid
- Treating the bank balance as the same as retained profit and paying dividends based on available cash rather than checking the profit and loss position
- Paying dividends that exceed retained profits, creating an illegal dividend that may need to be repaid to the company
- Not accounting for Corporation Tax when calculating available profits for dividends, as the tax liability reduces distributable profits even if not yet paid
- Forgetting that previous year losses reduce the amount available for dividends even in a year where the company is profitable
Frequently Asked Questions
What is the difference between retained profit and cash in the bank?
Retained profit is an accounting figure representing accumulated profits minus taxes and dividends. Cash is what is physically in your bank account. They differ because of timing (unpaid invoices, prepayments), non-cash items (depreciation), and liabilities (tax owed but not yet paid). You can have high retained profit but low cash, or vice versa.
Can I pay myself a dividend if my company has retained profits?
Yes, as long as the retained profit figure is positive and the dividend does not exceed the available distributable profits. You also need sufficient cash to actually make the payment. A board minute declaring the dividend and dividend vouchers should be prepared for each payment.
What happens to retained profit if my company makes a loss?
The loss reduces retained profit. If losses exceed previous accumulated profits, retained profit becomes negative. When retained profit is negative, no dividends can be paid until the company earns enough to bring the figure back into positive territory.
Should I keep retained profit in the company or take it as dividends?
It depends on your personal tax position, cash flow needs, and business plans. Keeping profit in the company builds a financial buffer and can fund growth. Taking it as dividends gives you personal access but incurs dividend tax. Many directors balance both, taking regular dividends while maintaining a reserve in the company.
Source: Companies Act 2006, Part 23 - Distributions
Related Terms
A dividend is a payment a company makes to its shareholders from its profits. For director-shareholders, it's a tax-efficient way to extract money from your company.
A balance sheet shows what your company owns (assets), what it owes (liabilities), and the difference (equity) at a specific point in time.
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