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Business owners: getting retained profits into your retirement
If you own a limited company, the profit it has kept after Corporation Tax belongs to the company, not to you. It becomes your money only when it is paid out, and how it is paid out decides how much tax is taken on the way. A director with a large sum retained has more choices than most people, and more ways to pay tax twice. This guide covers the four routes, the 2026/27 tax on each, the traps, and how Isaac models them.
Why retained profit is not a pension
Corporation Tax has already been paid on retained profit, but Income Tax, dividend tax or Capital Gains Tax has not. The company is a separate legal person. Until money leaves it as salary, pension contributions, dividends or capital, you cannot spend it, and if you die it is valued in your estate: a company that mainly holds cash and investments does not usually qualify for Business Property Relief.
Route 1: employer pension contributions
The company pays into your pension directly. The contribution is a deductible cost for Corporation Tax, there is no National Insurance on it and no Income Tax when it goes in. It is taxed only when drawn, with a quarter tax-free.
- Annual Allowance: £60,000 in 2026/27, tapered by £1 for every £2 of adjusted income over £260,000, down to a floor of £10,000.
- Carry forward: unused allowance from the previous three tax years, provided you were a member of a registered pension scheme in those years.
- Timing: the money is locked until your normal minimum pension age, 57 from April 2028, and from April 2027 unused pension funds count for inheritance tax.
Route 2: keep the company and draw dividends
A company that has stopped trading can keep its reserves and pay dividends each year. They are taxed on top of your other income at 10.75% in the basic-rate band, 35.75% in the higher band and 39.35% above £125,140, after a £500 dividend allowance. In retirement your Personal Allowance and basic-rate band may be partly free, so a steady dividend can be taxed lightly. Against that: the company stays open with annual accounts and filings; its investment returns are taxed at 19–25%; and its whole value stays in your estate.
Route 3: close the company (members’ voluntary liquidation)
Where there is more than £25,000 to distribute, a formal MVL pays the funds out as capital. The gain over what your shares cost, less the £3,000 annual exempt amount, is taxed under Business Asset Disposal Relief at 18% (from 6 April 2026; 14% in 2025/26) on the first £1 million of lifetime qualifying gains, and at 24% above. A liquidator is required, typically costing a few thousand pounds.
- Trading condition: the company must have been a trading company, and you must have held at least 5% of the shares and votes for two years, broadly speaking. Long periods of sitting on cash can put this at risk.
- Anti-phoenixing: if you carry on a similar trade within two years, HMRC can treat the distribution as income instead.
Route 4: sell the business
If the business is worth more than its cash, a share sale is taxed like a liquidation: a capital gain with Business Asset Disposal Relief on the first £1 million. The price normally includes the retained funds. Earn-outs, loan notes and deferred consideration change the timing and sometimes the tax; a valuation is worth getting before you plan around a figure.
Comparing the routes
| Route | Tax on the way out | Speed | Inheritance tax |
|---|---|---|---|
| Employer pension contributions | None going in; 25% tax-free and Income Tax on the rest when drawn | Locked until 57 | In the estate from April 2027 |
| Dividends | 10.75% / 35.75% / 39.35% after £500 | As slow as you like | Company value in the estate, no BPR |
| Liquidation | 18% on the first £1m of gains, 24% above | Months | Proceeds in your estate as savings |
| Sale | As a liquidation | Depends on the buyer | As a liquidation |
Most directors do best with a blend: fill the pension in the last trading years, then liquidate, and use dividends only where a basic-rate band would otherwise go unused. The right blend depends on other income, health, what you want to leave and whether you might start again.
How Isaac models it
Turn on Your company in More → Features and Your company appears in Your Plan (Premium). Enter the retained funds, the profit while trading, the age trading stops, the employer pension contribution each year, and the route for the rest. Isaac grows the funds inside the company net of Corporation Tax (19% to 25% with marginal relief), pays the contributions into your pots and tests them against the Annual Allowance, taxes dividends in the dividend bands on top of your other income, applies Business Asset Disposal Relief and CGT to a liquidation or sale and drops the proceeds into your savings, and counts whatever remains in the company in your estate. The Company extraction tool runs each route through your whole plan, pension-first included, and sets them side by side on tax, how long your money lasts and what is left.
What Isaac does not model: your salary and National Insurance, dividends drawn while still employed elsewhere, the anti-phoenixing test, earn-outs, loan notes, trusts and family investment companies with several shareholders. It is a planning tool, not advice; your accountant confirms what applies to you.
Key takeaways
- Money in the company is not yours until it leaves; the door it leaves by sets the tax.
- Employer pension contributions are usually cheapest, within the Annual Allowance and carry forward.
- A members’ voluntary liquidation turns the rest into a capital gain at 18% on the first £1 million.
- Dividends spread the bill but keep the company, its admin and its inheritance tax exposure alive.
- Compare the routes against your whole plan, not one year’s tax bill.