Can you pay dividends if your company has made a loss?

A company can still pay dividends even if it has made a loss in the current year, provided it has sufficient retained profits in its accounts.

Dividends must be paid out of distributable profits. In simple terms, that means accumulated profits after Corporation Tax, less any accumulated losses.

So, if the current year is loss-making, how do you know whether enough profit remains to support a dividend? That depends on the company’s retained profit position at the time the dividend is declared.

In this article, Kerry Newman, Head of SG Accounting, explains more.

What is the legal position?

Under section 830 of the Companies Act 2006, a company may only make a distribution out of profits available for that purpose. These are accumulated, realised profits minus accumulated, realised losses.

This is a strict legal requirement which applies to companies of all sizes – from multi-nationals to one-man contractor companies.

You can read HMRC’s guidance on interaction between company law and dividend distributions here: CTM15205.

Current year loss vs retained profits

If your company is making a loss in the current year, this does not, on its own, mean that a dividend cannot be paid.

The key measure is whether the company has sufficient retained profits to cover the dividend.

For example:

• Year 1: £60,000 profit retained
• Year 2: £20,000 loss

Despite the loss in the current company year, the business still has £40,000 of distributable reserves available.

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Therefore, the directors can distribute a dividend up to that level.

However, if the current loss exceeds the amount of retained profits, the position changes:

• Year 1: £30,000 profit retained
• Year 2: £40,000 loss

In this example, the company is now in a negative financial position with no retained profits, so the directors can not pay a dividend.

Why the balance sheet position matters

The ability to pay dividends is determined by the company’s balance sheet position, not just its profit and loss account.

Directors are expected to rely on relevant up-to-date accounts when declaring dividends.

This is particularly important where:

• The company has made losses since the last year end
• Large dividends have already been taken during the year
• There are significant expenses or adjustments not yet reflected in the filed accounts

This is where accounting software like FreeAgent and Xero is so vital. Assuming all transactions have been updated, you should be able to see a real-time estimate of the company’s retained profit.

Relying on outdated or inaccurate figures is a common cause of incorrect dividend payments.

Timing issues contractors often miss

Small company directors sometimes make dividend distributions throughout the year without a formal review of reserves.

This creates a risk where:

• Dividends are taken monthly or quarterly based on expected profits
• Actual profits turn out to be lower than expected
• The final accounts indicate that there were insufficient reserves

If this occurs, some earlier dividends may need to be reclassified, creating an accounting headache. In some cases, ‘ultra vires’ dividends may even be reclassified as employment income (see below).

What happens if dividends are paid without sufficient profits?

Dividends paid when there are not sufficient reserves are often described as unlawful dividends.

Some practical consequences can include:

• The amount is treated as a director’s loan, potentially triggering additional tax charges if not repaid within a pre-prescribed time period.
• Reclassification as salary, subject to income tax and Class 1 National Insurance Contributions.
• Adjustments to the company’s Corporation Tax position
• Potential issues if the company becomes insolvent, as unlawful distributions may need to be repaid

In many cases, unlawful dividends are identified during the preparation of the accounts and subsequently corrected. However, this may result in an additional tax liability for the director, the company, or both.

Dividends vs salary

Where there are sufficient distributable profits available, extracting them as dividends is often the most tax-efficient way to pay yourself as a director

If your profits are volatile, a higher salary may be more prudent, as this may provide more certainty.

Find out what the most tax-efficient salary is for 2026/27.

Some practical points for directors

Before you declare a dividend, you should check the level of retained profits, ideally using up-to-date figures from your accounting software rather than estimates.

If income or expenditure has not been fully recorded, the available reserves can easily be overstated.

If you have any uncertainty, get in touch with your accountant.

Even in a one-person company, dividends should be properly documented, with board meeting minutes and a dividend voucher for each shareholder. These can be automatically generated from your accounting software, or you can download templates here.

Your accountant will usually flag any issues; however, the responsibility for ensuring dividends are lawful rests with the company director(s).