The short answer is no. You cannot legally declare a dividend when your company has made a loss in the current year, unless the company has sufficient retained profits from previous years to cover it. A dividend declared from loss is unlawful under the Companies Act 2006. If you pay one anyway, you personally risk having to repay it, and HMRC can treat it as an illegal distribution with serious tax consequences.
This is one of the most common misunderstandings we see as ICAEW-qualified accountants. A director looks at the bank balance, sees cash in the account, and assumes they can pay a dividend. But dividends do not come from cash. They come from distributable profits. Those are two very different things.
Let me walk through the rules, the exceptions, and what happens if you get it wrong.
What the Law Says About Distributable Profits
Section 830 of the Companies Act 2006 is the starting point. It says a dividend can only be paid out of profits available for the purpose. Those are the company's accumulated, realised profits, minus its accumulated, realised losses. That is the legal definition of distributable profits.
Realised profits are profits the company has actually earned through trading or other income. Unrealised gains, like a revaluation of a property you have not sold, do not count. Realised losses are losses the company has actually incurred.
If your company made a loss in the current year, you need to check whether retained profits from prior years are large enough to absorb that loss and still leave a positive balance. If they are, you can declare a dividend. If they are not, you cannot.
There is no grey area here. The directors must sign a statement confirming that the company has sufficient distributable profits before declaring a dividend. If you sign that statement when the profits are not there, you are personally liable.
The Difference Between Cash and Profits
This is where directors trip up most often. Your company might have £50,000 in the bank but have made a loss of £20,000 in the current year. The cash might be there because you delayed paying suppliers, or because you received a loan, or because you sold an asset. None of those create distributable profits.
Think of distributable profits as the cumulative profit the company has earned over its entire life, after tax, that has not been distributed yet. That is the retained earnings figure on the balance sheet. Cash is just one asset. The company might owe £30,000 to creditors, have £10,000 in unpaid tax, and have £5,000 in accrued expenses. The cash is not free money.
I had a client in Birmingham, a small engineering firm, who looked at their bank balance in December and saw £45,000. They wanted to pay a £30,000 dividend to the two directors. The management accounts showed a £15,000 loss for the year so far. The retained earnings from prior years were only £8,000. The distributable profit was zero. They could not pay a dividend. We restructured their drawings as a director's loan instead, and repaid it once the next year's profits came through.
What Happens If You Pay a Dividend From a Loss Anyway
If you declare a dividend when the company does not have distributable profits, the dividend is unlawful. The consequences are not theoretical.
You must repay it. The director who authorised the dividend and received it is personally liable to repay the full amount to the company. If there are multiple directors, they are jointly and severally liable. The company can sue you to recover the money.
HMRC can reclassify it. If HMRC discovers an unlawful dividend, they can treat it as a director's loan. That triggers a tax charge under Section 455 of the Corporation Tax Act 2010. The company pays 33.75% of the loan amount as tax, repayable only when the loan is repaid. If the loan is not repaid within nine months and one day of the year-end, the tax is due permanently.
Directors' duties are breached. Paying an unlawful dividend is a breach of your duty under Section 172 of the Companies Act 2006 to promote the success of the company. It can also be a breach of your duty to exercise reasonable care, skill and diligence under Section 174. That opens you up to claims from shareholders, creditors, and liquidators if the company becomes insolvent.
Insolvency risk. If the company later enters liquidation, the liquidator will look at any dividends paid in the period before insolvency. An unlawful dividend paid when the company was insolvent or became insolvent as a result is a transaction at an undervalue. The liquidator can recover the money from the directors personally.
The One Exception: Interim Dividends
There is a procedural distinction between final dividends and interim dividends that matters here.
A final dividend is proposed by the directors and approved by shareholders at the annual general meeting. It is declared based on the finalised annual accounts. If those accounts show a loss, you cannot declare a final dividend.
An interim dividend is declared by the directors during the year, before the year-end accounts are finalised. The directors must have reasonable grounds to believe the company has sufficient distributable profits at that point. If the year-end accounts later show a loss, but the interim dividend was declared in good faith based on management accounts that showed a profit, the dividend is still valid.
That is the narrow exception. It does not give you permission to ignore the rules. You must have a reasonable basis for believing profits existed at the time of declaration. If you knew the company was loss-making and declared a dividend anyway, the interim dividend is unlawful.
How to Check If You Have Distributable Profits
You need to look at the balance sheet, not the profit and loss account. The retained earnings figure in the equity section of the balance sheet is the starting point.
Take a simple example. Your company started trading three years ago. Year one profit after tax: £20,000. Year two profit: £15,000. Year three loss: £10,000. Retained earnings at the start of year three were £35,000. After the £10,000 loss, retained earnings are £25,000. You can declare a dividend of up to £25,000.
Now take a different example. Year one profit: £5,000. Year two profit: £3,000. Year three loss: £12,000. Retained earnings at the start of year three were £8,000. After the loss, retained earnings are negative £4,000. You cannot declare any dividend until future profits restore the retained earnings to a positive balance.
If you are unsure, ask your accountant to run a distributable profits calculation. As ICAEW qualified accountants, we do this for clients regularly. It takes ten minutes and avoids months of legal hassle.
What to Do Instead of an Unlawful Dividend
If your company has made a loss and you need to take money out, you have options.
Director's loan. The company can lend you money. That is legal, provided the loan is documented and interest is charged if it exceeds £10,000. The company must pay Section 455 tax at 33.75% if the loan is not repaid within nine months and one day of the year-end. Repay it from future profits, and the tax is refunded.
Salary or bonus. You can pay yourself a salary or bonus. That creates a tax and NI cost, but it is legal regardless of whether the company is making a profit or a loss. The salary is an expense, so it increases the loss. But if you need the money, it is a clean way to take it.
Expense reimbursement. If you have incurred business expenses personally, the company can reimburse you. That is not a distribution. It is a repayment of money you spent on the company's behalf.
Wait for profits. If the loss is temporary, wait. Declare the dividend once the next year's profits restore the retained earnings. That is the simplest and safest option.
I had a client in Bristol, a creative agency, who made a £30,000 loss in 2023/24 after a client went bust. They had £15,000 in retained earnings from prior years. They could only declare £15,000 of dividends, not the £40,000 they wanted. We structured the remaining £25,000 as a director's loan, repaid it from the 2024/25 profits, and the Section 455 tax was fully refunded. Clean, legal, no risk.
The Role of Management Accounts
If you want to declare an interim dividend, you need reliable management accounts. Not a spreadsheet you threw together in ten minutes. Proper accruals-based management accounts that show the true financial position.
Many small companies do not prepare management accounts regularly. If that is your situation, do not declare an interim dividend without them. The risk of getting it wrong is too high.
If you are using accounting software like Xero or FreeAgent, you can run a profit and loss report and a balance sheet report. Those give you the raw data. But they are only as accurate as the data entered. If you have not recorded all invoices, expenses, accruals, and prepayments, the reports are misleading.
Our bookkeeping and compliance team helps clients set up monthly management accounts specifically to support dividend decisions. It is a small investment that prevents large problems.
What HMRC Looks For
HMRC does not routinely check whether every dividend is supported by distributable profits. But they look when something triggers a review. A company that consistently declares dividends while reporting losses on its corporation tax return is a red flag. A company that goes into liquidation with large dividends declared in the prior year is a red flag. A director who claims they cannot pay a tax bill because the company has no money, but has taken large dividends, is a red flag.
If HMRC investigates and finds unlawful dividends, they will reclassify them. The director then owes income tax and NI on the amount, plus interest and penalties. The company owes Section 455 tax. The total tax cost can easily exceed 60% of the dividend amount.
Compare that to doing it properly. A legal dividend costs the director 8.75% or 33.75% in dividend tax, depending on their income band. That is the only cost. The difference between 8.75% and 60% is the price of getting the law wrong.
Directors' Personal Liability
This is the part directors often do not realise. If you authorise an unlawful dividend, you are personally liable to repay it to the company. The company can sue you. If the company becomes insolvent, the liquidator can sue you. If HMRC is a creditor, they can pursue you personally for the tax that should have been paid.
Directors' liability insurance does not cover unlawful acts. If you knowingly pay a dividend from a loss, you are acting outside the law, and your insurance will not protect you.
The Companies Act 2006 gives directors a defence if they can show they acted in good faith and on reasonable grounds. But that defence is hard to sustain if you did not check the accounts, or if you knew the company was loss-making and paid a dividend anyway.
I have seen directors forced to remortgage their homes to repay unlawful dividends. It is not a theoretical risk. It happens.
How We Help
At Holloway Davies, we advise clients on dividend planning as part of our regular work. We check the distributable profits position before any dividend is declared. We prepare dividend vouchers that document the legal basis for the payment. We keep a running record of retained earnings so clients always know their position.
If your company has made a loss and you need to take money out, contact us. We will run the numbers and tell you exactly what is possible, whether that is a reduced dividend, a director's loan, or a salary. We will not let you make a mistake that costs you personally.
If you want to understand the basics of how dividends work in a limited company, our fundamentals guide covers the full picture, including the tax rates and the documentation requirements.
The Bottom Line
A dividend declared from loss is unlawful unless prior year retained profits cover the loss. You cannot pay a dividend just because there is cash in the bank. The distributable profits test is the only test that matters.
If you get it wrong, you personally repay the money, HMRC reclassifies it, and you face penalties and interest. If you get it right, you pay dividend tax at the normal rates and sleep soundly.
Check your retained earnings before you declare a dividend. If you are not sure, ask your accountant. That is what we are here for.