Dividends and distributable profits are key concepts that every company director should understand before taking money out of a business. If you are wondering how to pay dividends from a limited company, it is important to know that UK company law imposes strict rules on when dividends can be declared and paid. Paying dividends without sufficient distributable profits can result in unlawful dividends, potentially requiring shareholders to repay the funds and exposing directors to personal liability. Understanding the rules can help you remain compliant while extracting profits from your company in a tax-efficient manner.
What Is a Dividend?
A dividend is a payment made by a company to its shareholders from the company’s profits.
In practice, there are two common types of dividends:
Final Dividends
Final dividends are usually paid once a year after the company’s annual accounts have been prepared. The directors recommend the dividend, and the shareholders approve it.
Interim Dividends
Interim dividends are paid during the financial year before the annual accounts are finalised. These are normally declared by the directors without requiring shareholder approval.
When Can a Company Pay Dividends?
Under the Companies Act 2006, a company can only pay dividends from its accumulated realised profits after deducting any accumulated realised losses.
In simple terms, this means that a company must have sufficient profits available for distribution before any dividend can be paid.
Not all profits shown in the accounts can automatically be distributed to shareholders.
What Are Realised Profits?
Realised profits are profits that the company has actually earned and can generally access in cash or cash-equivalent form.
Examples include:
- Profits from trading activities
- Profits from the sale of assets
- Income received from customers
- Certain foreign currency gains
These profits are normally available for distribution as dividends, provided there are no accumulated losses that reduce the available reserves.
What Are Non-Distributable Profits?
Some gains appearing in a company’s accounts are accounting profits only and cannot be used to pay dividends.
These are often referred to as unrealised or non-distributable profits.
Examples may include:
- Property revaluation gains
- Certain fair value gains on investments
- Other gains that have not yet been converted into cash
Although these gains increase the company’s net assets and may improve the balance sheet, they do not necessarily create distributable reserves.
Example: Investment Property Gains
Imagine a company owns two investment properties.
At the year end, the market value of each property increases by £30,000. The company’s accounts therefore show a gain of £60,000 before tax.
Many directors assume this means they can pay a dividend from this gain.
Unfortunately, this is not usually the case.
The properties have not been sold and the company has not received any cash. The increase in value is simply an accounting adjustment. Until the properties are sold and the gain becomes realised, the profit is generally not available for distribution.
If a dividend is paid using these unrealised gains, the dividend may be unlawful.
Why Unlawful Dividends Can Be a Problem
Declaring dividends without sufficient distributable reserves can have serious consequences.
Potential issues include:
- Shareholders being required to repay the dividend
- Directors becoming personally liable
- Breaches of the Companies Act 2006
- Problems during company sales, audits, due diligence reviews or insolvency proceedings
For this reason, directors should always verify available distributable reserves before declaring dividends.
Keeping Track of Distributable Profits
Many companies do not separately identify distributable and non-distributable reserves in their accounts.
As a result, directors can mistakenly assume that all retained profits shown on the balance sheet are available for dividends.
Maintaining accurate records of distributable reserves is therefore essential, particularly for:
- Property investment companies
- Companies holding investments
- Businesses using fair value accounting
- Groups with complex company structures
Regular reviews help ensure dividends remain compliant with company law and accounting requirements.
How UK-Accountant Can Help
At UK-Accountant, we regularly advise directors and shareholders on dividend planning, distributable reserves, and profit extraction strategies.
Before declaring a dividend, we can review your accounts, calculate available distributable profits, prepare dividend paperwork, and ensure that all payments comply with the Companies Act 2006 and current accounting guidance.
Whether you are a small business owner, property investor, contractor, or growing company, obtaining professional advice before paying dividends can help you avoid costly mistakes and protect both the company and its directors.
Need Advice on Dividends?
If you are unsure whether your company has sufficient distributable profits, or if you would like assistance with dividend planning, contact UK-Accountant today.
Our experienced team can help you maximise tax efficiency while ensuring your dividends remain fully compliant with UK company law.
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- Dividends and Distributable Profits