Can Your UK Limited Company Pay a Dividend? Check Distributable Profits First

Start with the legal test, not the bank balance

Companies Act 2006 section 830 sets the general rule: a distribution may be made only out of profits available for that purpose, broadly accumulated realised profits less accumulated realised losses not already used in a distribution or capitalisation. Other statutory requirements may apply.

This is more specific than current-month profit, EBITDA or cash received. Unrealised gains, historical losses, earlier dividends and adjustments can affect the amount available. Ask your accountant to confirm the calculation if the position is unclear.

Use relevant accounts to support the payment

Section 836 addresses the accounts used to justify a distribution. The latest annual accounts may support the proposed dividend; where they do not, appropriate interim or initial accounts may be needed under the statutory rules. A casual management estimate is not automatically sufficient.

Bring the records up to date, account for material liabilities and tax, and check whether losses since the last accounts affect the position. Keep the accounts and workings used for the decision so the basis can be explained later.

Worked example: profits and cash are different

Suppose, purely for illustration, a company has £40,000 accumulated realised profits and £15,000 accumulated realised losses, with no other relevant adjustments or previous distributions. The simplified available-profit calculation gives £25,000. A bank balance of £60,000 does not increase that limit.

The reverse also matters. Even if relevant accounts support a £20,000 distribution, paying it may be unwise if payroll, tax and supplier payments leave little cash headroom. Legal profit availability and operational cash affordability are separate checks.

Document the decision and shareholder entitlement

Check the articles, share rights and appropriate approval procedure, including the distinction between interim and final dividends. GOV.UK guidance describes recording a directors’ meeting and retaining minutes, and preparing a dividend voucher for each payment.

The voucher should include the date, company name, shareholder name and dividend amount. Apply the relevant share rights rather than assuming all shareholders receive equal cash amounts. Seek advice before waivers, different share classes or unusual arrangements.

Keep dividends separate from other withdrawals

A payment to a director is not automatically a dividend. Salary, expense reimbursement, loan repayment and director-loan movements have different accounting and tax consequences. Use accurate records rather than relabelling withdrawals after the event.

An unlawful distribution can create recovery and director-responsibility issues. If a payment may have exceeded available profits, get advice promptly; do not assume a future profitable month cures the original problem.

Add an affordability check before paying

Prepare a near-term cash view covering tax, payroll, creditors, committed investment and realistic customer receipts. If the business is under financial strain, directors should obtain advice about their duties before making distributions.

This guide does not compare personal tax rates or recommend dividends over salary. Shareholder tax treatment depends on circumstances and current law. Use accountant-reviewed figures and documented decisions rather than a generic online rule of thumb.

Sources and further guidance

• Companies Act 2006: section 830
• Companies Act 2006: section 836
• GOV.UK: taking money out of a limited company

General guidance, not accounting, legal or tax advice. Confirm the treatment for your circumstances with a qualified adviser.