Retained profits to retirement: pension, dividends, liquidation or sale?

Money in your company is not yours until it leaves, and the way it leaves sets the tax. Employer pension contributions are usually cheapest; a members’ voluntary liquidation turns the rest into a capital gain at 18%; dividends spread the bill over years but leave the company, and its inheritance tax exposure, running. Most directors do best with a blend.

Figures for the 2026/27 tax year · Published 2 October 2026

Plenty of owner-managed companies reach their founder’s late fifties with a large sum of retained profit: money that has already paid Corporation Tax and now sits as cash or investments. It cannot simply become a pension. It has to come out, and there are four main doors. This piece walks through them with 2026/27 figures and a worked example, and shows how Isaac models them.

Door one: employer pension contributions

The company pays into your pension directly. The contribution is a deductible cost, so it comes off profit before Corporation Tax; there is no National Insurance on it; and no Income Tax is due when it goes in. You pay tax only when you draw it in retirement, with a quarter of it tax-free. For most directors it is the cheapest door in the building.

• Annual Allowance: £60,000 a year in 2026/27, tapered by £1 for every £2 of adjusted income over £260,000, down to £10,000.
• Carry forward: unused allowance from the previous three tax years can be added, so a first big contribution can be well over £100,000.
• The catch: the money is locked until your normal minimum pension age (57 from April 2028), and from April 2027 unused pensions count for inheritance tax.

Door two: keep the company and draw dividends

A company that has stopped trading can keep its reserves and pay you a dividend each year. Dividends are taxed on top of your other income: nothing on the first £500, then 10.75% in the basic-rate band, 35.75% in the higher band and 39.35% above £125,140. Spread over many years in retirement, a good slice can sit in the basic band. The price is that the company stays open, with accounts and filings every year; its investment return is taxed at Corporation Tax rates; and because it mostly holds cash, it does not usually qualify for Business Property Relief, so its whole value sits in your estate.

Door three: close it with a members’ voluntary liquidation

If there is more than £25,000 to distribute, a formal MVL lets the funds be paid out as capital rather than income. After the £3,000 annual exempt amount, Business Asset Disposal Relief taxes the first £1 million of your lifetime qualifying gains at 18% (up from 14% on 6 April 2026), and 24% applies above that. A liquidator has to be appointed, which costs a few thousand pounds, and if you start a similar business within two years HMRC can tax the whole distribution as income instead.

Door four: sell the business

If the company is worth more than its cash, a sale is taxed the same way as a liquidation: a capital gain with Business Asset Disposal Relief on the first £1 million. The price usually includes the retained funds, so they are not counted twice. Earn-outs and deferred payments complicate the timing, and a realistic valuation matters more than anything else on this list.

A worked example: £1 million at 58

Priya is 58, the sole director of a consultancy with £1,000,000 of retained funds, and plans to stop trading at 60. The company makes £150,000 a year until then. She has a full State Pension forecast of £12,548 from 67 and wants £45,000 a year after tax in retirement.

• Pension first. The company pays £60,000 into her pension in each of the last two trading years, plus carried-forward allowance from earlier years: say £270,000 in total. Each pound saves Corporation Tax at up to 26.5% in the marginal band on the way in, and comes out later with 25% tax-free and most of the rest at 20%, an effective rate of about 15%. Isaac adds it to her pot each trading year and checks it against the allowance.
• Liquidate the rest. Closing the company at 61 with about £800,000 left: £797,000 after the exempt amount, taxed at 18% is roughly £143,000, leaving £657,000 in her savings. Fast, final, and the money is hers to invest in ISAs over time.
• Dividends instead. Drawing £60,000 a year from 61: once the State Pension starts, about £37,000 of each year’s dividend falls in the basic band and the rest in the higher band, so the tax is about £12,000 a year, 20%, for as long as the funds last. Dropping to £38,000 a year keeps it all in the basic band at about £4,000 a year (10.6%), but takes a quarter of a century, with the company’s growth taxed at 19–25% and its value exposed to 40% inheritance tax throughout.

The usual answer is the blend: fill the pension while the company still trades, then liquidate, and let dividends do the work only where the basic-rate band would otherwise go unused. Which blend is right depends on her other income, her health, what she wants to leave, and whether she might start another business. Those are questions for her accountant; the arithmetic is what Isaac is for.

What to check before you decide

• Trading status. Business Asset Disposal Relief needs a trading company, and a company that has sat on cash for years can lose it. Timing the liquidation matters.
• The anti-phoenixing rule. Two years with no similar trade after an MVL. If you plan to consult on the side, talk to your accountant first.
• Your Annual Allowance history. Carry forward can turn one good year into a very large contribution, but only if you were a pension scheme member in the years you are carrying from.
• Inheritance tax. A cash-rich company is in your estate; a pension will be from April 2027. Neither is automatically the safe harbour it used to be.

How Isaac models it

Turn on Your company in More → Features and Your company appears in Your Plan. Enter the retained funds, the profit while trading, the age trading stops, the employer pension contribution the company pays, and how the rest reaches you. Isaac grows the funds inside the company net of Corporation Tax, pays the contributions into your pots, taxes dividends in the dividend bands on top of your other income, applies Business Asset Disposal Relief and CGT to a liquidation or sale, drops the proceeds into your savings, and counts whatever is still in the company in your estate. The Company extraction tool runs every route through your whole plan and sets them side by side. It is a planning tool, not advice.