Retained earnings

Also called Reserves, Distributable reserves

Profit the company has made and not paid out. It sets the legal limit on the dividends you can take.

What it means

Retained earnings are the accumulated after-tax profits of a company since it started, less any dividends already paid out. They sit on the balance sheet as part of shareholders' funds.

Why it matters

A company can only pay a dividend out of distributable reserves. If the reserves are not there, the payment is unlawful — regardless of what is in the bank account — and can be reclaimed from the shareholder, with tax consequences.

This catches owner-managers regularly: a good bank balance is not the same as available profit, particularly when VAT and corporation tax money is sitting in it.

What it looks like in practice

Before declaring a dividend, check the reserves figure, not the bank balance. Your bookkeeping software can show a rough position; your accountant can confirm it.

Document the decision — a board minute and a dividend voucher — at the time. Reconstructing it afterwards is what makes HMRC treat the payment as salary.

What to watch out for

Taking money out monthly and calling it a dividend at year end. If the reserves turn out not to have covered it, it becomes an overdrawn director's loan account with a tax charge attached.

Negative reserves. They do not stop you trading, but they do stop you paying dividends until they recover.

Where to get proper advice

Your accountant, before the payment rather than after. Companies House and HMRC guidance covers the mechanics.