When a company is nearing its end, retained profits often become the biggest concern. Directors want to know what happens to the money left behind and how much of it they will actually keep.
This is a fair question. Retained profits usually represent years of work, risk, and growth. How they are handled depends on timing, method, and whether the correct steps are followed.
Understanding this early helps directors avoid tax surprises and compliance issues once the company is gone.
What Retained Profits Are and Why They Matter at Closure
Retained profits are the accumulated earnings of a company after corporation tax and dividends. They remain inside the company until they are formally distributed.
While a company is trading, retained profits are often left untouched or paid out gradually. When a company closes, those profits come into focus. They cannot simply be transferred to a director’s personal account without consequence.
At the point of closure, HMRC looks closely at how profits are extracted. The difference between income and capital treatment can significantly impact the amount of tax paid. That is why retained profits matter far more during closure than during regular trading.
How Common Company Closures Really Are
Company closures are far from unusual. According to Companies House, more than 726,000 UK companies were dissolved in the 12 months to March 2025, with many of these dissolutions being voluntary.
This indicates that winding up a company is a common occurrence in business life. In many of these cases, companies still held cash reserves or retained profits that needed to be dealt with appropriately before dissolution.
Can Retained Profits Be Taken before the Company Closes?
In certain situations, retained profits are taken out before the company is formally dissolved. This is typically achieved through dividends or final salary payments while the company is still operational.
The issue is tax. Profits taken out this way are usually treated as income. For higher-rate taxpayers, this can significantly reduce the amount they keep.
What Happens to Retained Profits during the Closure Process
When a company closes, retained profits are generally distributed as part of the winding-up process. The way they are taxed depends on how the company is closed and whether all legal conditions are met.
If a company is struck off and still has profits, HMRC may treat those funds as income. This often comes as a surprise to directors who assumed the money would be treated as capital.
Formal closure routes are specifically designed to address this issue. For directors focused on closing a company with retained profits, the choice of process directly affects the tax outcome.
Why Strike off Is Often Misunderstood
Strike off looks simple. It is quick. It is inexpensive. For companies with little or no money left, this can be an appropriate option.
Problems arise when profits remain inside the company. Distributions are charged at income rates rather than capital rates. This can result in a significant personal tax bill for directors.
How a Members’ Voluntary Liquidation (MVL) Treats Retained Profits
A Members’ Voluntary Liquidation is specifically designed for solvent companies with retained profits to distribute. It is a formal closure process used when a company can pay all of its debts, and directors want to extract remaining funds in the most tax-efficient and compliant way.
Under an MVL, retained profits are generally treated as capital distributions rather than income. This distinction matters. Capital treatment typically means Capital Gains Tax applies instead of Income Tax, which can significantly reduce the overall tax bill. In many cases, directors may also qualify for Business Asset Disposal Relief, further lowering the effective tax rate on distributions.
Why Planning Ahead Changes the Outcome
The difference between a smooth closure and an expensive one is often planning. Directors who review their retained profits early have more flexibility. They can choose the right timing and the right method.
Leaving decisions until the end limits options. Tax treatment becomes less favourable. Pressure increases. Mistakes are more likely. Planning allows directors to exit on their own terms rather than reacting to rules they did not fully understand.
Next Steps if Your Company Has Retained Profits
Retained profits are one of the most valuable parts of a company. Closing a company without thinking carefully about how those profits are handled can undo much of that value.
Understanding what happens to retained profits when you close a company helps directors protect what they have built. With the right approach, closure can be orderly, compliant, and financially sensible.
