Retained profit is not taxed again while it stays in the company, but leaving your accumulated cash there has a cost. For a high-earning consultant the sharpest route is usually an employer pension contribution, deductible for corporation tax under FA 2004 s.196 and free of National Insurance. The routes below compare it against dividends, investing inside the company, and a wind-up at the 18% Business Asset Disposal Relief rate in force from 6 April 2026.
What is retained profit, and is it taxed again while it stays in the company?
Retained profit is what is left after your company has paid corporation tax on its profits and has paid out any dividends. It sits in the company's reserves on the balance sheet, and it stays the company's money until it is extracted. Retained profits from a few strong private-practice years reach six figures without any deliberate decision being made.
The reassuring half of the answer is true. Profit that has already borne corporation tax is not taxed again while it stays in the company. The second layer arrives only when the money comes out, as dividend tax, as capital gains tax, or as an income charge under an anti-avoidance rule. That makes this a deployment question more than an extraction one.
Why retained profits build up in a private practice company
Your company pays corporation tax at 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between, for the financial year beginning 1 April 2026. How that scale works in detail, including the marginal-relief fraction and the associated-companies trap, is set out on the guide to corporation tax for a GP or consultant company.
That is cheaper than the 40% or 45% you would pay personally on the same private-practice income, so the incentive is to leave the profit where it is. Stack both layers together and a pound of company profit reaching you at the additional rate costs roughly 51%, at 19% corporation tax and the 39.35% dividend rate for 2026/27. It costs more again where marginal relief applies.
Deferring that second layer is rational. Deferring it indefinitely, with no plan for the balance, is where the problems in the rest of this guide start.
What are the advantages and disadvantages of retained profit sitting as cash?
The advantages are real, and they are why the balance is left there. You control the timing, so you can extract in a year when your other income has fallen. You keep a working buffer for equipment, indemnity and staff costs. And you keep the option of paying the balance into a pension in a year of your choosing, which is the route covered next.
The disadvantages are less visible, because none of them shows up on a tax return until much later.
- The return on idle cash is poor. Interest is company income and is taxed at the company's corporation tax rate, so what looks like a safe holding loses ground against inflation after tax.
- The balance sheet drifts. Cash and investments that grow relative to your fee income put the company's trading status in question, and with it Business Asset Disposal Relief at 18% from 6 April 2026.
- Business relief for inheritance tax does not follow the cash. Cash held for no identified business purpose is an excepted asset under IHTA 1984 s.112 and attracts no relief, even inside a company that is otherwise trading.
- The decision gets harder as the balance grows. A larger balance narrows your options, because the two-year BADR clock and the annual allowance both work on time you have already spent.
How much room do you have for an employer pension contribution?
A contribution paid by your company into your own registered pension scheme is usually the most efficient deployment available, and for two separate reasons. It is deductible for corporation tax, and it carries no National Insurance on either side under ITEPA 2003 s.308. That second point is what makes it beat salary, because salary is deductible too.
Purpose decides deductibility and no percentage of your salary caps it. BIM46035 allows an employer contribution made for the purposes of the trade, and the ground HMRC names for refusing one is a remuneration package out of line with what the work is worth. For the pound-for-pound comparison against taking a dividend, see the salary versus dividend guide.
FA 2004 s.196 gives the relief only once the contribution has been paid. A resolution before your year end achieves nothing on its own; the cash itself must clear the company account inside the accounting period.
The size of the contribution is capped by your annual allowance, which can be tapered and which unused allowance carried forward from earlier years may extend; the NHS pension annual allowance calculator works those mechanics through. For an NHS consultant that is the sharp edge. Growth in your NHS defined-benefit pension already consumes part of the allowance before your company pays anything, so model that side first.
Where the allowance is exhausted, a further contribution triggers an annual allowance charge at your marginal rate, which turns the most efficient route into an expensive one. Where that happens, weigh the marginal pound against the dividend route using the same salary versus dividend guide.
Should you pay yourself dividends over time instead?
Take the retained profit as a dividend and 2026/27 charges it at 10.75%, 35.75% and 39.35% across the three bands, after a £500 dividend allowance; the split itself is covered on the salary versus dividend guide. Timing, more than the rate, is the planning lever on this page.
A consultant who drops sessions, takes a sabbatical, or reduces private work before retirement has a window in which the same distribution lands in a lower band. The company can hold the retained profits until then, which is one of the few genuinely free options here.
A spouse or civil partner who owns shares in their own right can also draw against their own bands. Whether that holds up is decided by the settlements legislation at ITTOIA 2005 s.619 onwards, which the salary versus dividend guide covers in full.
One knock-on is worth naming. A large dividend lifts your adjusted net income in the year you take it, and the consequences of that further up the scale are set out on the guide to adjusted net income for doctors.
What happens if you invest the retained profits inside the company?
Investing the balance inside the company is often described as a free lunch, and it is not one. CTA 2009 Part 9A charges a distribution a company receives only where the distribution is not exempt (s.931A), and dividends reaching a UK company are normally exempt, so investment income escapes a second charge inside the structure.
Interest and chargeable gains realised by the company fall outside that exemption and are taxed at its corporation tax rate. Two further costs sit behind the exemption, and both survive it.
The first is that the money is still inside the company, so it reaches you only through the dividend route at the 2026/27 rates above, or through a wind-up. The second is that exempt dividends still count as augmented profits under CTA 2010 s.18L.
Dividends received from any company other than a 51% subsidiary of yours, its parent, or a quasi-subsidiary therefore count, pushing you towards the £1.5 million quarterly instalment threshold and towards the marginal-relief limits, even though they are not themselves taxed. Those limits are divided by the number of associated companies.
The inheritance tax position is the one most often stated wrongly. A business consisting wholly or mainly of making or holding investments is not relevant business property at all under IHTA 1984 s.105(3). So an investment company gets no business relief on any part of its value.
Where the company is genuinely trading and does qualify, s.112 strips out excepted assets, which is where a cash pile held for no identified business purpose falls out. Only what survives both gates reaches the 100% relief allowance. That allowance is capped at £2.5 million from 6 April 2026, transferable up to £5 million between spouses and civil partners, with relief at 50% above it.
This guide explains how those rules work. It does not recommend any investment, and an investment decision needs a regulated adviser.
How does an investment portfolio put your trading status at risk?
Business Asset Disposal Relief is charged at 18% on qualifying disposals from 6 April 2026, up from 14% in 2025/26. To claim it on a share sale or a wind-up, your company must be a trading company throughout the two-year period ending with the disposal.
You must also have held at least 5% of the ordinary share capital and voting rights, been entitled to at least 5% of the economic interest, and been an officer or employee, throughout that same period. There is a £1 million lifetime limit per individual.
What the relief actually saves you has narrowed, and that matters more than the headline rate. The main capital gains rate on assets other than residential property is 24% for a higher-rate taxpayer from 6 April 2026. So BADR is now worth up to 6 percentage points on a qualifying gain, not the much larger saving the old 10% rate delivered. On £500,000 of qualifying gains that is a £30,000 difference.
HMRC decides trading status by asking whether trading is the company's main activity. On all the facts, it weighs the nature and size of the trading against the non-trading activity, the proportion of assets held for investment, the sources of income, and the management time given to each. HMRC's guidance runs from CG64060 onwards.
A private practice with a modest portfolio alongside active fee-earning work is generally fine. A company that has wound down its clinical work and is now mainly managing a portfolio is not.
The timing point is the one that catches people. The test applies at the date of disposal and across the two preceding years, so a balance sheet that drifted two years ago costs you the relief today and the clock cannot be wound back. If you expect to sell or wind up, review the position at least two years ahead, never on the eve of it.
Free Incorporation and private practice tool
Model your tax saving from incorporating your private practice
Our interactive tool is built for a larger screen. Tell us your situation and one of our medical accountants who works with doctors will pick it up, so a specialist medical accountant there can send your figure and the sensible next step. Enquiring commits you to nothing.
Want this checked against your specific situation?
Leave your details and a one-line summary. One of our medical accountants who works with doctors reads it and makes contact. Enquiring commits you to nothing.
Does a family investment company solve it?
A family investment company holds the portfolio away from the trading company, so the practice balance sheet stays clean for BADR. The advantage is structural separation and never a lower rate: the FIC pays corporation tax on its own returns and its distributions carry the same 2026/27 dividend rates. It gets no business relief for inheritance tax at all, because a company holding a share portfolio is the paradigm case of the s.105(3) exclusion.
How does members voluntary liquidation tax compare with a dividend?
A members' voluntary liquidation, or MVL, is a formal solvent wind-up in which a licensed insolvency practitioner is appointed, the liabilities are settled and the remaining assets are distributed to shareholders. The process is the insolvency practitioner's work and not something an accountant can run for you. What this page can tell you is what it costs in tax, because the distribution is capital rather than income and that changes the rate you pay.
Take Dr K, an illustrative consultant closing a private-practice company that holds £200,000 of retained profits after corporation tax, with the BADR conditions met and base cost ignored. Through an MVL the distribution is capital: £200,000 at 18% is £36,000 of tax. Taken as a dividend while she is an additional-rate taxpayer, £200,000 at 39.35% is £78,700.
The difference is £42,700 on a single decision. What changes the answer is trading status, the £1 million lifetime limit, and condition C of the winding-up rule below. If any of the three fails, the capital treatment goes and the comparison collapses.
That winding-up rule is the anti-phoenix TAAR at ITTOIA 2005 s.396B, inserted by FA 2016 s.35. It applies to distributions made on or after 6 April 2016, and it treats the distribution as income rather than capital where four conditions are all met:
- Condition A. You held at least a 5% interest in the company immediately before the winding up.
- Condition B. The company was a close company at some point in the two years ending with the start of the winding up.
- Condition C. You continue to carry on, or are involved with, the same trade or a similar one within two years of the distribution.
- Condition D. It is reasonable to assume that avoiding or reducing income tax was a main purpose of the winding up.
Condition C is the one that catches doctors, because resuming private work within two years of closing a private-practice company is the ordinary case, and hardly an exotic one. Where all four conditions bite, the distribution is charged to income tax at dividend rates and BADR goes with the capital treatment, which is the £42,700 swing above running in reverse.
£100,000 of retained profit, four routes compared (2026/27)
The table below takes £100,000 of pre-tax company profit and follows it through four routes. It assumes the 19% small-profits corporation tax rate, that you are an additional-rate taxpayer, and that enough annual allowance room exists to absorb the pension contribution in full. Base cost and the £500 dividend allowance are excluded for clarity. Your own answer depends on your actual profit, your allowance position and your shareholding.
| Route | Corporation tax on £100,000 profit | After-tax cash in company | Personal tax on extraction | Amount reaching you (or your pension) | Key caveat |
|---|---|---|---|---|---|
| Employer pension contribution | Nil (deductible, profit reduced to zero) | £100,000 paid into the pension directly | Nil (no income tax, no National Insurance) | £100,000 in your pension | Capped by your annual allowance, which can be tapered and which carry-forward may extend |
| Dividend to you at the additional rate | £19,000 (19% small-profits rate) | £81,000 | £31,874 (39.35% additional dividend rate) | £49,126 | Not NHS-pensionable; £500 dividend allowance excluded here |
| Dividend to a basic-rate spouse shareholder | £19,000 | £81,000 | £8,708 (10.75% ordinary dividend rate) | £72,292 | Genuine shareholding required; the settlements legislation at ITTOIA 2005 s.619 onwards applies |
| Capital through an MVL with BADR | £19,000 | £81,000 | £14,580 (18% BADR rate, base cost ignored) | £66,420 | Trading status and the 5% and officer-or-employee conditions across two years; £1m lifetime limit; s.396B risk |
The pension route wins on the arithmetic, but only where the allowance room genuinely exists. Where your allowance is fully tapered and there is nothing to carry forward, that row disappears. The real choice is then between the timing of a dividend and a capital extraction, with the BADR conditions deciding whether the last row is available to you at all.
The NHS pension position that applies to every route
Company income, dividends, capital distributions and investment returns are all outside the NHS Pension Scheme. Only your NHS employment generates pensionable pay, so no amount of private-practice profit, however it is deployed, adds to your NHS accrual. An employer contribution builds a separate defined-contribution pot that sits alongside the scheme without topping it up.
The two worlds meet at the annual allowance, because growth in your NHS defined-benefit pension counts against the same allowance as anything your company pays in. That is why the room available for a company contribution is often much smaller than the headline allowance suggests, and why the calculation has to start with the NHS side.
Common mistakes with retained profits in a consultant's company
- Paying dividends without checking the carry-forward position first. Assuming the annual allowance is fully used by NHS growth, and defaulting to a dividend, can cost the most efficient route available in that year.
- Letting the portfolio grow without reviewing trading status. A buffer becomes a material non-trading asset over several years of retained profits, and by the time a wind-up is planned the two-year BADR window has already run with the company in a mixed position.
- Extracting at 39.35% when a lower-income year is coming. If you are reducing sessions within a few years, the company can hold the balance until the distribution falls in a lower band.
- Starting an MVL without testing condition C. Resuming similar private work within two years of the distribution is exactly what ITTOIA 2005 s.396B is aimed at, and the check belongs before the liquidator is appointed.
- Assuming business relief will shelter the company at death. It does not reach an investment company at all under IHTA 1984 s.105(3), and it does not reach excepted cash inside a trading company under s.112.
How do you decide which route fits your company?
The right route depends on four things you can measure: your annual allowance position including NHS growth, the balance sheet against the trading-status test, when you expect to stop private work, and your income in the years between. The employer pension calculation, the trading-status review and the dividend against capital comparison belong in the same model, so that all four routes are costed on your own numbers.
If retained profits have been accumulating in your private-practice company, the time to model this is before the two-year BADR clock runs the wrong way and before a contribution year closes. Read how we work with consultants, or the guides to pension contributions and tax relief for doctors and CGT and BADR on selling a private practice. Then get in touch through the contact page to discuss your position.