Who this is for: For founders retaining profits inside their trading company and considering where those profits should sit long-term.
Your company pays 25% corporation tax on profits. You pay 33.75% to 39.35% dividend tax when you extract those profits personally. The combined rate on extracted profits (corporation tax plus dividend tax) is approximately 54% to 57%.
The combined rate on retained profits is 25%.
The gap between 25% and 54% is not a tax planning opportunity. It is arithmetic. Capital retained inside the structure compounds at a rate that capital extracted personally cannot match.
The numbers over time
Assume a founder has £500,000 of annual profits. They need £150,000 for personal expenditure. The remaining £350,000 can either be extracted (paying approximately £118,000 in dividend tax, leaving £232,000 to invest personally) or retained inside the structure (paying 25% corporation tax, leaving £262,500 to compound inside the structure).
The annual difference is £30,500. Over ten years, compounding at 7% per annum, the retained capital scenario produces approximately £420,000 more than the extracted scenario.
| Year | Retained in structure (7% p.a.) | Extracted and reinvested (7% p.a.) | Difference |
|---|---|---|---|
| 1 | £262,500 | £232,000 | £30,500 |
| 5 | £1,531,000 | £1,353,000 | £178,000 |
| 10 | £3,626,000 | £3,205,000 | £421,000 |
What the holding company does
A holding company above the trading company allows profits to flow upward as inter-company dividends, which are generally exempt from corporation tax under the dividend exemption rules. The holding company can then deploy that capital into investments, property, or new trading ventures without triggering a personal tax event.
The founder extracts only what they need. The rest compounds inside the structure at the corporate rate.
The Private Capital Engine is not a tax scheme. It is the decision to let capital compound at 25% instead of extracting it at 54%.
The structure does not change what the founder earns. It changes how much of what they earn stays working for them.
What This Looks Like for Your Numbers
The structures described in this article are not theoretical. They are the architecture that founders at the £500k+ profit level install to stop capital leaking into the personal tax system. The audit maps your current position and shows you the specific gap in your numbers.
The audit is free. The Discovery Call is a 30-minute working session where Alex maps your specific position. The £500 is credited in full against the Capital Architecture.
25% Is Still the Right Rate to Compound At
Corporation tax at 25% is a Stability-layer event. It changes the cost of retaining profits inside the trading company. It does not change the fundamental advantage of retaining profits inside a corporate structure rather than extracting them at 33.75% to 45% personal rates.
The Growth layer (a holding company that receives intercompany dividends tax-free and compounds retained capital at corporate rates) is where the 25% rate works in the founder's favour rather than against them.
The Expansion layer is the constitutional architecture that governs how retained capital is invested, protected, and eventually transferred, so that the compounding that happens inside the structure at 25% does not get reversed by a tax event at the end of it.