Running a group
Can a company pay dividends from previous years' profits?
Yes, if the profits are still distributable reserves. How to check, interim versus final dividends, the paperwork, illegal dividends, and the holding company effect.
Reviewed by Omar Aswat CTA ·
Yes. A company can pay a dividend out of profits it made in earlier years, as long as those profits are still sitting in its reserves and haven't been used up by losses or earlier dividends. The test is the company's accumulated realised profits, not the profit of the current year.
That surprises some owners, who think a dividend must come from this year's profits. It doesn't. This article explains what counts, how to check, and what the paperwork looks like.
What the law says
Section 830 of the Companies Act 2006 says a company may only make a distribution out of profits available for the purpose. Those profits are its accumulated, realised profits, less its accumulated, realised losses, and less amounts already used by earlier distributions or capitalisation. So the test looks at the total reserves built up over the life of the company.
Three things follow:
- Earlier years count. Retained profit from three years ago is available today, if still unused.
- Losses count too. A loss this year, or a brought-forward loss, reduces what you can pay.
- Realised means realised. A revaluation gain on a building or an unrealised gain on investments generally isn't a realised profit, so it doesn't support a dividend.
A worked example
This is an illustration, not a client example. A company has retained profits brought forward of £150,000 from earlier years. So far this financial year it has made a loss of £40,000 and it has no other reserves. A director wants to pay a £120,000 dividend.
| Amount | |
|---|---|
| Retained profits brought forward | £150,000 |
| Less loss for the year to date | (£40,000) |
| Distributable reserves | £110,000 |
| Proposed dividend | £120,000 |
| Shortfall | £10,000 |
A dividend of up to £110,000 can be paid, if the company also has the cash and can meet its debts as they fall due. £120,000 can't. Splitting it into two payments doesn't change the answer.
How you evidence distributable reserves
Section 836 of the Companies Act 2006 requires the profits to be shown by relevant accounts. For most private companies that means the last annual accounts, or interim accounts if the last annual accounts don't give a sufficient picture, such as after a large loss or a dividend since the year end. The accounts must let a reasonable judgment be made about the amounts.
In practice, before a significant dividend, we suggest:
- an up-to-date management account or balance sheet showing the reserves;
- a check that the cash exists, and that the company can pay its debts after the dividend;
- a note of corporation tax and other liabilities still to be paid.
Interim versus final dividends
- Interim dividends are normally decided by the directors during the year. They are paid when the directors decide, and they can be paid more than once.
- Final dividends are recommended by the directors and approved by the shareholders, usually after the year end.
Under the model articles for private companies, the directors can pay interim dividends and the shareholders declare final ones, but your articles may differ, so check them. Either way, the dividend must be paid by reference to the rights attached to each class of share.
The paperwork
For every dividend, keep:
- Board minutes (and a shareholder resolution for a final dividend) recording the amount, the date and that the directors considered the reserves;
- A dividend voucher for each shareholder showing the company, date, amount and share class;
- The accounts or workings showing the distributable reserves on the date of the decision.
The date matters. A dividend is paid when it is properly declared or resolved, and you can't backdate it to a previous tax year.
Illegal dividends and what happens
If a company pays a dividend without enough distributable profits, it is unlawful. Under section 847 of the Companies Act 2006, a shareholder who knew, or had reasonable grounds to believe, that the payment was unlawful must repay it to the company. Directors who approved it can face claims for breach of duty. In practice, an unlawful dividend can end up treated as a loan to the shareholder, which can bring a section 455 charge of 35.75% on the company if it is not repaid in time. See dividends and extracting profit.
Mistakes are easier to correct early. If you suspect a past dividend was paid without enough reserves, talk to us before the next accounts are filed.
How a holding company changes it
With a holding company, there are two sets of reserves, and each company's dividend is judged on its own.
- TradeCo's reserves support a dividend up to HoldCo. TradeCo's retained profits from earlier years can be paid up in one go, normally free of corporation tax under Part 9A of the Corporation Tax Act 2009.
- HoldCo's reserves support a dividend out to you. A newly inserted holding company usually starts with none, so TradeCo pays up first, then HoldCo pays you.
- Timing. Paying earlier years' profits up to HoldCo is how cash is protected from trading risk. See protecting cash in a holding company.
You are not forced to pay everything out. HoldCo can keep the cash, and you take a dividend from HoldCo only when you need one. Check what that is likely to cost in the holding company calculator.
Mistakes we see
- Paying from the bank balance, not the reserves. Cash in the bank is not the same as distributable profit. Customer deposits, loans and tax owed all inflate cash.
- Ignoring the corporation tax bill. Reserves on the balance sheet may not yet reflect tax due on this year's profit.
- Treating a revaluation as profit. A gain on property or investments that has not been realised does not support a dividend.
- Forgetting loans from the company. If you owe the company money, a dividend can be set against it, but that should be done deliberately and recorded, not left to chance.
- Backdating minutes. It creates more problems than it solves, and we will not do it for you.
If you find one of these has happened, tell us early. Many problems can be put right with proper accounts and a correcting resolution.
Talk to us
If you want to pay a dividend from retained profits, or you are not sure an earlier one was lawful, book a call. We respond the same working day.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
