What are retained earnings?

What are retained earnings?

Retained earnings are the profits a company has built up over its life and kept in the business. They are what remains after Corporation Tax and dividends paid to shareholders. Losses reduce that running total.

What is retained profit?

Retained profit means the same thing as retained earnings. Both terms describe profits left in the company rather than paid out as dividends.

The retained earnings definition covers profits across years. It does not just mean the profit made this year.

Where do retained earnings appear in UK accounts?

Retained earnings appear on the balance sheet under capital and reserves. In UK accounts, the line is often labelled "profit and loss account" or "profit and loss reserve".

Companies generally must prepare both a profit and loss account and a balance sheet. GOV.UK explains what annual accounts include. The profit and loss statement shows the result for one financial year. Retained earnings are the running total across years.

See our guides to understanding your profit and loss and the financial year vs tax year difference for more context.

How to calculate retained earnings

Opening retained earnings + profit after tax (or − loss) − dividends = closing retained earnings.

The closing balance becomes the opening balance for the next year. Here is how that works:

The loss in Year 3 reduces the balance, even though the company pays no dividends.

Why retained earnings matter for dividends

A dividend is a payment a company can make to shareholders if it has made a profit. GOV.UK's dividend guidance states:

Your company must not pay out more in dividends than its available profits from current and previous financial years.

Look at the accumulated position, rather than this year alone. HMRC's guidance on profits available for distribution explains that these are accumulated, realised profits not already distributed or capitalised, less accumulated realised losses. Capitalised means transferred into share capital.

A gain from revaluing an asset is unrealised and does not count. If reserves include unrealised gains, the amount available for dividends can be lower than the retained earnings figure.

What if a dividend exceeds available profits?

Dividends paid beyond available profits are unlawful. A shareholder who knows, or has reasonable grounds to believe this, is liable to repay the unlawful amount. In private companies run by director-shareholders, HMRC expects them to know the position.

In a close company, an unlawful dividend can be treated as a loan to the shareholder. A close company is broadly one controlled by a small group of shareholders or by its directors. Read our director's loan account guide to understand the consequences.

What do negative retained earnings mean?

Negative retained earnings are an accumulated deficit. Losses have left the company with a negative running balance.

A deficit usually means there are no available profits, so the company cannot pay a dividend until later profits clear it. A profitable current year does not make a dividend possible on its own, because earlier losses still count.

Does keeping retained profit avoid Corporation Tax?

No. Retained profit has already had Corporation Tax charged in the period it was earned. Keeping it in the company does not avoid Corporation Tax. Dividends are not a business cost when calculating that tax.

Keeping profit in the company can defer personal tax on dividends until they are paid. For the shareholder side, see our UK dividend tax guide.

Retained earnings vs revenue, profit and share capital

Revenue

Income from sales before costs and tax are deducted.

Profit

What remains after costs for a particular period. Check whether the figure is before or after tax.

Retained earnings

Accumulated profits after tax, less losses and dividends, kept in the company across years.

Share capital

The amount shareholders have subscribed for shares. It is separate from profits earned by the business.

Before paying a dividend

• Check up-to-date accounts for available profits, including earlier losses and dividends already paid.
• Check the company has enough cash to pay the dividend and meet its other commitments.
• Hold a directors' meeting to declare the dividend. Keep minutes even if you are the only director.
• Write a dividend voucher showing the date, company name, shareholder names and dividend amount.
• Give the recipients a copy of the voucher and keep a copy in the company records.

You must usually pay dividends to all shareholders. Our guide to taking dividends legally covers the process. We can also help with your year-end accounts.