Why it matters
They form part of the company’s equity and help explain how past performance has changed its financial position. They need to be read alongside current results, liabilities and any restrictions. The figure is useful when discussing the history of profits, but it is not a separate savings pot or a substitute for checking lawful distributable profits.
A practical example
A simplified company begins with £20,000 retained earnings, makes £10,000 profit after tax and pays £6,000 dividends. Ignoring other adjustments, retained earnings become £24,000. The cash balance can be much lower because funds may be tied up in assets or working capital.
A common misunderstanding
A retained earnings balance is not automatically the amount directors should distribute today. Current losses, accounting adjustments and legal requirements can affect the decision, while cash needs affect affordability. Review up-to-date information before declaring a dividend.
General information for UK readers, updated 3 November 2026. Examples are illustrative. Tax treatment depends on the facts and current rules; seek advice before making a decision.