Updated: 28 January 2026
When you close your company, any retained earnings must be dealt with correctly. What happens to that money depends on whether your company is solvent, how much profit is left, and how you choose to close it.
If your company is solvent with significant retained profits, a Members’ Voluntary Liquidation is usually the most tax-efficient option. For smaller balances, a company strike-off may be suitable. If your company is insolvent, retained earnings are used to repay creditors.
This guide explains what happens to retained earnings when a company closes, how they are taxed, and which option is right for you.
What are retained profits (retained earnings)?
Retained profits, also called retained earnings, are the profits a company keeps after paying Corporation Tax and dividends to shareholders. This is the money left in the company rather than taken out personally by the Director.
Directors usually retain profits to:
- Fund future growth
- Create a financial safety buffer
- Delay personal tax.
When a company closes, these retained profits must be extracted and taxed. The way you close the company determines how much tax you pay on that money, so choosing the correct closure route is essential.
What happens to retained earnings when a company closes?
What happens to your retained earnings when your company closes depends on whether it is solvent or insolvent at the point of closure.
If the company is solvent (can pay its debts)
If your company can pay all of its liabilities, you will first need to decide how you are going to close it down.
You will typically choose between:
- Members’ Voluntary Liquidation (MVL): This is a formal liquidation process for solvent companies and is usually the most tax-efficient way to extract large retained profits.
- Company strike-off (dissolution): This is a simpler and less expensive process, usually best suited to companies with only small amounts of retained profit.
Once the closure route has been chosen, the process then follows this strict legal order:
- All company assets are gathered together: This includes cash in the company bank account, retained earnings, and any other assets owned by the company.
- All outstanding debts are paid in full: Creditors such as HMRC, suppliers, lenders, and service providers must be settled before any money can go to shareholders.
- Remaining funds are distributed to shareholders: Only after all debts are cleared can the remaining balance, including retained earnings, be paid out to the company’s shareholders.
The crucial difference between an MVL and a strike-off is how the retained earnings are taxed at the point they are distributed. Choosing the wrong route can mean paying far more tax than necessary.
If the company is insolvent (cannot pay its debts)
If your company cannot pay its debts as they fall due, you cannot use a strike-off or an MVL. A popular option in these situations is to close the company through a Creditors’ Voluntary Liquidation (CVL). This is a formal insolvency procedure led by a licensed Insolvency Practitioner.
In a CVL, the process works very differently:
- A Liquidator takes control of the company: Once appointed, the Liquidator becomes responsible for the company’s affairs and decision-making.
- All company assets are identified and sold: This includes cash, retained earnings, equipment, stock, and anything else the company owns.
- The money is distributed to creditors first: Funds are paid out in a strict legal order, starting with secured creditors, then preferential creditors (such as employees), and finally unsecured creditors.
Because the company cannot pay its debts, retained earnings do not belong to the Director. They form part of the general asset pool used to repay creditors. Directors should not withdraw funds from the company once insolvency is likely, as this can lead to legal and financial consequences.
Related: How to Spot the Warning Signs of an Insolvent Company
Closing a company with retained profits over £25,000
If your company has more than about £25,000 in retained profits, a Members’ Voluntary Liquidation is usually the most tax-efficient way to close it down. An MVL allows the funds to be treated as capital rather than income, which typically results in a much lower tax bill than taking the same money as dividends or salary.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation is a formal process for closing a solvent company and must be carried out by a licensed Insolvency Practitioner. The Liquidator ensures the closure is compliant and that all legal and tax obligations are met. The process typically involves:
- Appointing a licensed Insolvency Practitioner: They manage the entire liquidation and act in the interests of both creditors and shareholders.
- Signing a Declaration of Solvency: This confirms that the company can pay all of its debts in full within 12 months.
- Settling all company liabilities: This includes HMRC, suppliers, lenders, and any remaining business expenses. Many Directors choose to settle these matters before appointing an Insolvency Practitioner to expedite the process.
- Distributing the remaining funds to shareholders: After all debts are cleared, the remaining balance, including retained profits, is distributed to the shareholders.
How retained profits are taxed in an MVL
One of the main reasons Directors choose an MVL is the way retained profits are taxed. Instead of being treated as income, the funds are treated as capital, which usually results in a much lower tax rate. This means:
- Retained profits are taxed under Capital Gains Tax (CGT)
- They are not taxed as salary or dividends.
- They often qualify for Business Asset Disposal Relief (BADR), subject to meeting the qualifying conditions.
This favourable tax treatment is what makes an MVL the preferred option for closing a profitable company with significant retained earnings.
Related: How to Pay the Least Tax When Closing a Limited Company
Closing a company with retained profits under £25,000
If your company has less than £25,000 in retained profits, you may be able to close it using a simple company strike-off.
Company strike-off (dissolution)
A strike-off is generally only suitable for low retained profits because HMRC treats the final distribution very differently from an MVL. When closing a company through a strike-off:
- All company funds must be withdrawn before the strike-off is submitted: This includes the full balance of retained profits in the company bank account.
- Money is taken out as income: Final withdrawals are normally taken as dividends or salary/bonus payments.
- The funds are taxed as income, not capital: This means the distribution is subject to dividend tax rates or Income Tax and National Insurance.
Because Income Tax is much higher than Capital Gains Tax, striking off a company with more than £25,000 in retained profits can result in a much larger tax bill. For this reason, strike-off is usually only suitable for low balances.
Business Asset Disposal Relief (BADR) and MVLs
Business Asset Disposal Relief can reduce the tax you pay on retained profits when you close your company through a Members’ Voluntary Liquidation. It works by applying a lower Capital Gains Tax rate to qualifying profits. Even with recent rate increases, BADR can still lead to significant tax savings for many Directors.
For a long time, the BADR rate was 10%. However, it increased in April 2025 and will be increasing again in April 2026:
- 14% CGT on qualifying gains: Applies to disposals made between 6 April 2025 and 5 April 2026
- 18% CGT on qualifying gains: Will apply to disposals made from 6 April 2026 onwards
- £1 million lifetime limit still applies: Once you exceed this limit, any further gains are taxed at standard CGT rates.
What happens without BADR?
If you do not qualify for BADR, your retained profits distributed through an MVL will be taxed at the standard Capital Gains Tax rates:
- 18% for basic rate taxpayers
- 24% for higher and additional rate taxpayers.
Even without BADR, CGT is still usually far more tax-efficient than taking retained profits as dividends or salary, which can attract much higher Income Tax and National Insurance.
Who qualifies for BADR?
To qualify for Business Asset Disposal Relief, all of the following conditions must be met throughout the qualifying period:
- You must hold at least 5% of the company’s ordinary share capital and voting rights
- You must be a Director or an employee of the company
- You must have owned the shares for at least two years before disposal
- The company must be a trading company, not an investment company.
If any of these conditions are not met, BADR will not apply, and standard CGT rates will be used instead.
Related: How BADR Works in an MVL
Why timing your MVL matters more than ever
Because BADR rates are now rising, the timing of your MVL can have a direct impact on how much tax you pay:
- Closing before 6 April 2026 may still allow you to benefit from the lower 14% BADR rate.
- From April 2026 onwards, qualifying gains will be taxed at 18%, reducing the overall tax saving.
This makes planning essential for Directors with large retained profits. Taking professional advice before starting the MVL process can help ensure you don’t lose unnecessary value through avoidable tax.
MVL costs vs tax savings
A Members’ Voluntary Liquidation does involve professional fees. This covers legal work, statutory reporting, and fund distribution.
However, for most profitable companies, the tax savings achieved through an MVL usually far outweigh the cost, particularly where:
- Retained profits exceed £25,000
- The distribution is taxed under Capital Gains Tax rather than Income Tax.
- Business Asset Disposal Relief (BADR) reduces the CGT rate even further.
MVL vs strike-off: tax treatment and cost effectiveness
| Members’ Voluntary Liquidation | Company Strike-Off | |
|---|---|---|
| Typical use case | Retained profits over £25,000 | Retained profits under £25,000 |
| Professional fees | From £995 (+ VAT and disbursements) | Minimal (your accountant might charge a fee to help you) |
| How profits are taxed | Capital Gains Tax (CGT) | Income tax or dividend tax |
| BADR eligibility | Yes, if criteria met | No |
| Typical tax rate | 14% with BADR (18–24% without) | Up to 39.35% dividend tax or 45% income tax |
| Overall tax efficiency | High for larger balances | Low for larger balances |
| Best suited for | Companies with significant retained earnings | Companies with small remaining balances |
In many cases, Directors can save £10,000 to £30,000 or more in tax even after MVL fees, which is why an MVL is usually the better option for larger retained profits. For very small balances, a simple strike-off is often the more cost-effective choice.
When an MVL is not suitable
While a Members’ Voluntary Liquidation is the most tax-efficient option for many solvent companies, it is not suitable in every situation. You should not use an MVL if:
- The company is insolvent: If the business cannot pay its debts, a Creditors’ Voluntary Liquidation is often the best option.
- Retained profits are below £25,000: In these cases, the cost of an MVL often outweighs the tax benefit, making a simple strike-off the more practical option.
- There are unresolved disputes or legal claims: Issues such as ongoing litigation, employment disputes, or creditor challenges must be settled before an MVL can proceed.
- The company has complex assets or tax issues: Matters such as complicated loan accounts, unpaid tax liabilities, or hard-to-value assets may need to be resolved first. Once these are resolved, then the MVL process can be used.
In these situations, Clarke Bell can advise on the most appropriate closure route for your company. Our team of experts will guide you to the safest and most cost-effective option based on your specific circumstances.
Other financial and compliance tasks when closing a company
Closing a company involves more than just choosing the right liquidation route. There are several final tax and compliance tasks that must also be completed correctly to avoid delays, penalties, or unexpected tax bills. These typically include:
Submitting the final Corporation Tax return: This confirms the company’s final trading position and any tax due to HMRC.
VAT deregistration: You must cancel the company’s VAT registration and submit any outstanding VAT returns.
Closing payroll and RTI submissions: Final Real Time Information filings must be sent to HMRC, even if no further wages are being paid.
Reconciling Director’s loan accounts: Overdrawn or outstanding balances can trigger additional tax charges if not dealt with properly.
Reviewing capital allowances and potential clawbacks: Some tax reliefs claimed on assets may need to be repaid when the company closes.
If these steps are missed or handled incorrectly, they can result in unexpected tax liabilities or delays to the company closure process, which is why professional guidance is strongly recommended.
Clarke Bell can help
If your company is solvent with retained profits to distribute, choosing the right closure route is key to avoiding unnecessary tax. For many Directors, a Members’ Voluntary Liquidation is the most tax-efficient way to close a profitable company.
Clarke Bell has helped thousands of Directors through the MVL process, offering clear, expert guidance at every stage. We provide a free, no-obligation consultation and fixed-fee packages, so you know exactly where you stand.
Contact Clarke Bell today for trusted advice on closing your company and accessing your retained profits tax-efficiently.
Frequently asked questions
What is the most tax-efficient way to close a limited company?
The most tax-efficient way to close a solvent limited company with significant retained profits is usually a Members’ Voluntary Liquidation, because the profits are taxed as capital gains rather than as income. This typically results in a much lower tax bill than closing the company through a voluntary strike-off.
Are retained profits taxed when a company closes?
Yes, retained profits are always taxed when a company closes. How they are taxed depends on the closure route used. If the company is closed through a Members’ Voluntary Liquidation, the profits are taxed as capital gains. If the company is closed by strike-off, the profits are taxed as income through dividends or salary.
Can I start another company after closing one with retained profits?
Yes, you can start another company after closing one with retained profits. Closing a company through an MVL or a strike-off does not restrict you from becoming a Director again, provided the closure was carried out properly and there was no misconduct.
You should be aware of the Targeted Anti-Avoidance Rule (TAAR) if you plan to start a similar business within two years of the MVL. Your Accountant/tax advisor should be able to advise you on this.
Can retained profits be paid out as dividends when closing the company?
Yes, retained profits can be paid out as dividends when closing a company, but they will be taxed at dividend tax rates rather than under Capital Gains Tax. For larger balances, this is usually far less tax-efficient than extracting the profits through a Members’ Voluntary Liquidation.
