Can You Declare a Dividend When the Company Has Made a Loss?

If your company has made a loss this year, you cannot legally declare a dividend. A dividend declared from loss is unlawful under the Companies Act 2006. It does not matter if you have cash in the bank. It does not matter if you need the income. The law is clear: dividends can only be paid from distributable profits.

This is one of the most common misunderstandings we see as ICAEW-qualified accountants. Directors see a positive bank balance and assume they can pay themselves a dividend. But company law does not work on a cash basis. It works on accumulated retained profits.

In this article, we explain what distributable profits actually are, what happens if you pay an illegal dividend, and what options you have when your company has no retained earnings to distribute.

What the Law Says About Distributable Profits

Section 830 of the Companies Act 2006 states that a dividend can only be paid out of "profits available for the purpose". Those profits are the company's accumulated realised profits, minus its accumulated realised losses. You calculate this from the company's annual accounts, not from its bank balance.

If your company made a loss in the current year, you look back at the full picture. Have you accumulated retained profits from previous years? If the total retained earnings figure in your balance sheet is positive, you may still have distributable profits even if this year was loss-making. But if the retained earnings figure is negative or zero, you have nothing to distribute.

This is the critical distinction. A dividend declared from loss is only illegal if the company has no accumulated realised profits to cover it. If you have £50,000 of retained profits from prior years and make a £10,000 loss this year, you still have £40,000 of distributable profits. You can declare a dividend up to that amount.

Why Cash in the Bank Does Not Mean You Can Pay a Dividend

This is the trap that catches many directors. Your company may have £30,000 in the bank but no retained profits. How is that possible?

Common scenarios include:

• You injected capital as a director's loan. That cash sits in the bank, but it is not profit. It is a liability you owe back to yourself.
• You have unpaid invoices or deferred income. The cash is there, but the profit has not been earned yet under accrual accounting.
• You have loan repayments due. The cash is spoken for, even if not yet paid.
• You have made losses in prior years that wipe out the current year's profit.

Your company's bank balance is not the same as its distributable reserves. The two can look very different, especially in young companies, companies with large director's loan accounts, or companies that have taken on debt.

What Happens If You Pay an Illegal Dividend?

If you declare a dividend when there are no distributable profits, that dividend is unlawful. The consequences can be serious.

Directors are personally liable. If the company becomes insolvent later, or if HMRC investigates, the directors who authorised the illegal dividend can be required to repay the full amount to the company. This is not a theoretical risk. HMRC routinely reviews dividends in insolvency cases and will pursue directors for repayment if the dividend was paid from capital.

The dividend is not valid. Shareholders who received the money can be asked to return it. If you are the sole director and shareholder, that means you. You may have already spent the money, but the legal obligation to repay remains.

Tax treatment can be reversed. HMRC can reclassify an illegal dividend as a director's loan or as salary. If it is reclassified as a director's loan, you could face a Section 455 tax charge of 33.75% on the amount, plus a benefit in kind charge if the loan exceeds £10,000. If it is reclassified as salary, you owe PAYE and National Insurance on the full amount, plus late payment penalties.

We have seen directors face five-figure tax bills years after the event because they paid dividends from losses. It is not worth the risk.

How to Check If You Have Distributable Profits

You do not need to be an accountant to check this, but you do need your latest set of annual accounts. Look at the balance sheet. Find the line called "Retained earnings" or "Profit and loss account reserve" within the equity section.

If that figure is positive, you have distributable profits up to that amount. If it is negative or zero, you do not.

For interim dividends (paid during the year, before year-end accounts are prepared), the directors must prepare interim accounts to confirm there are sufficient distributable profits. This is a legal requirement, not an optional step. Many directors skip this. That is how illegal dividends happen.

If you are unsure, ask your accountant to run a quick distributable profits check. Our team at Holloway Davies can do this in minutes from your management accounts.

What to Do Instead of Declaring a Dividend from Loss

If your company has no retained profits, you have several options. None of them involve paying an illegal dividend.

Pay Yourself a Salary

If you need the money, pay yourself a salary instead. Salary is a business expense, so it reduces your corporation tax liability. You will pay income tax and National Insurance on it, but that is often better than the consequences of an illegal dividend.

The most efficient salary for most directors is £12,570 per year (matching the personal allowance). This avoids income tax and employee NI, though employer NI of 13.8% applies above the secondary threshold of £9,100. If your company qualifies for the Employment Allowance (up to £10,500), the employer NI cost is covered.

Use a Director's Loan Account

You can take money from the company as a director's loan. This is not income. It is a loan you must repay. There are tax implications: if the loan exceeds £10,000, you have a benefit in kind to report on a P11D, and the company must pay Section 455 tax of 33.75% on loans not repaid within 9 months and 1 day of the year-end.

But a director's loan is legal. An illegal dividend is not. If you expect the company to become profitable next year, you can repay the loan and then declare a dividend to cover it. This is a common structure for businesses in a temporary downturn.

Wait Until You Have Profits

Sometimes the right answer is simply to wait. If your company is loss-making, focus on turning it around. Once you have accumulated retained profits, you can declare dividends again. Do not borrow from the company's capital to pay yourself now. That is how companies fail.

Consider a Capital Reduction

In rare cases, a company can reduce its share capital and distribute the surplus to shareholders. This requires a special resolution, a solvency statement from the directors, and approval from Companies House. It is complex and expensive. It is not a routine alternative to dividends. Speak to a corporate solicitor if this is relevant.

Real Example: A Loss-Making Ltd in Birmingham

A husband-and-wife company running a café in Birmingham's Jewellery Quarter made a loss of £18,000 in its second year. The bank balance was healthy at £25,000 because the directors had injected £40,000 as a director's loan in year one. The retained earnings figure on the balance sheet was negative £8,000.

The directors wanted to take a £12,000 dividend. We advised them that a dividend declared from loss would be illegal. Instead, they took the money as a director's loan. In year three, the company returned to profitability. They repaid the loan and declared a dividend from the new retained profits. The structure was clean, legal, and gave them the cash they needed without risking personal liability.

What If You Have Already Paid an Illegal Dividend?

If you have already declared a dividend from a loss, do not ignore it. The longer it sits, the harder it is to fix. Your options depend on whether the company still has the cash and whether you can rectify the position.

If the company has since made profits, you may be able to "regularise" the dividend by treating it as having been paid from those later profits. This is not automatic. You need a board resolution and updated accounts. Your accountant can guide you through this.

If the company is still loss-making, you need to consider whether the dividend can be reclassified as a director's loan. This requires a board resolution and changes to the company's accounting records. You may also need to file amended returns with HMRC.

If the company is insolvent or close to it, take legal advice immediately. Directors who pay illegal dividends from an insolvent company face personal liability for the company's debts, including potential disqualification as a director.

Final Checks Before Declaring Any Dividend

Before you declare a dividend, run through this checklist:

• Have you prepared management accounts showing retained earnings are positive?
• Have you held a board meeting and minuted the dividend declaration?
• Have you prepared a dividend voucher for each shareholder?
• Have you checked that the dividend does not exceed distributable profits?
• Have you considered the tax implications for each shareholder?

If the answer to any of these is no, stop and speak to your accountant first. A dividend declared from loss is not a minor paperwork issue. It is a breach of company law with real financial consequences.

If you are unsure about your company's distributable profits, contact our team. We can review your accounts and tell you exactly what you can and cannot distribute. It takes ten minutes and saves you from a potentially expensive mistake.