For many successful businesses, retained profit represents not just security, but opportunity. Once you’ve set aside sufficient reserves and covered working capital needs, excess retained profit can—and arguably should—be put to work. But what’s the most tax-efficient way to utilise it?
In today’s high-inflation environment and with corporation tax rates reaching 25% for profits over £250,000 (HMRC, 2023), business owners are increasingly looking for smarter ways to manage surplus cash. According to the British Business Bank’s Small Business Finance Markets Report 2024, 30% of SMEs with over £1 million in revenue held excess cash reserves, with a significant portion unsure how to deploy those funds effectively (British Business Bank, 2024).
What is a retained profit investment strategy?
A retained profit investment strategy is a plan for deploying surplus business profits (after all costs, salaries, dividends, reserves, and working capital are accounted for) to grow the company’s value, generate additional income, or protect against inflation—while minimising tax liability.
This might involve:
- Investing in financial instruments
- Purchasing property
- Lending to directors or shareholders (with caution)
- Creating a group structure to separate trading and investment activities
- Pension contributions or employee benefit schemes
Key benefits
- Compound growth within the company
By reinvesting profits in tax-efficient vehicles, businesses can benefit from compound returns that can be reinvested again, building long-term value.
- Tax efficiency
Certain investments—like pensions or qualifying venture capital schemes—offer attractive tax reliefs. For example, company contributions to a director’s pension are typically corporation tax deductible (MoneyHelper, 2024), reducing the tax bill while building retirement wealth.
- Diversification and protection
Investing surplus funds into assets like commercial property or low-risk bonds can spread risk and provide a buffer against market downturns or economic uncertainty.
- Exit strategy planning
Effective investment of retained profits can support a future business sale or management buyout by demonstrating strong financial management and reducing reliance on trading income.
Property investment: A long-term strategy with tangible benefits
Property remains one of the most popular ways to invest retained profits, particularly for businesses looking for a balance of capital preservation and income generation.
Why property?
- Stable, long-term returns: Property typically offers regular rental income and the potential for capital growth over time. According to Savills, prime UK commercial property yields remained resilient at 5–7% in 2023 despite broader market uncertainty (Savills, 2024).
- Tangible asset: Unlike shares or funds, property is a physical asset—often perceived as more secure during economic uncertainty.
- Inflation hedge: Rental income and property values often rise with inflation, helping protect the real value of invested capital.
- Use within the business: A business can purchase its own premises, paying rent to itself—turning a cost into an investment, with additional tax planning opportunities.
Tax and structural considerations
- Purchasing property within the company can tie capital into an illiquid asset, so it’s important to assess the business’s cash flow needs carefully.
- To minimise risk, many firms establish a separate property-holding company within a group structure. This keeps investment assets distinct from trading operations, protecting both in case of financial difficulty.
- Rental income is subject to corporation tax, and future capital gains may be taxed on disposal. However, reliefs such as the Substantial Shareholding Exemption (SSE) can help manage liabilities (Gov.uk, 2024).
Risks to watch
- Market fluctuations: Property values can fall as well as rise, particularly in uncertain economic climates or due to sector-specific risks (e.g. retail).
- Maintenance and vacancy: Owning property involves ongoing costs and the risk of empty periods that can affect returns.
- Tax changes: Government policy can shift—changes to capital gains tax, stamp duty, or interest deductibility could impact profitability
- Market fluctuations: Property values can fall as well as rise, particularly in uncertain economic climates or due to sector-specific risks (e.g. retail).
Still, with careful planning, property can serve as a secure income stream and an effective way to preserve the value of company equity while reducing long-term reliance on trading income alone.
Strategies worth considering
- Pension contributions
A company can contribute up to £60,000 per year into a director’s pension tax-free (or more using carry-forward rules) (MoneyHelper, 2024). This is often the simplest and most tax-efficient method to remove money from the company and invest for the future.
- Investment holding company
Setting up a holding company structure allows for retained profits to be transferred into an investment arm, separating risk from the trading business. Under the Substantial Shareholding Exemption, gains from the sale of qualifying subsidiaries can be tax-free (Gov.uk, 2024).
- Corporate investments
Some businesses opt to invest directly in equities, bonds, or funds. While gains are taxable, they are often taxed at lower rates than if withdrawn and reinvested personally.
- Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCTs
These high-risk, high-reward investments offer up to 30% income tax relief, plus capital gains tax exemptions. However, they are generally more suitable for personal investment than corporate, due to the qualifying criteria.
And Finally…
If your business has built up significant retained profit beyond its day-to-day needs, it’s a sign of strong financial health—and an opportunity to grow wealth for the future. But a retained profit investment strategy isn’t one-size-fits-all. It must align with your personal risk profile, growth ambitions, and tax planning goals.
Consulting with a tax advisor and financial planner is essential before making any major decisions. By doing so, you can ensure that every pound of your profit is working as hard as you are.
