A dividend is not “money out of the business account with a note on it”. It is a distribution under Part 23 of the Companies Act 2006, and if the conditions in that Part are not met the payment is not a dividend at all — it is an unlawful distribution, and in an owner-managed company it usually becomes a director’s loan with a Corporation Tax charge attached.
Three things make a dividend lawful: enough distributable profit, a proper decision, and paperwork recording it. None is difficult. All are routinely skipped.
Step 1: check you have distributable profits
Section 830 of the Companies Act 2006 is the whole test. A company may only distribute out of profits available for the purpose: its accumulated, realised profits not previously distributed or capitalised, less its accumulated, realised losses not written off in a proper reduction of capital.
Two words do most of the work.
“Accumulated” means you cannot look at the current year in isolation. A company that lost £40,000 last year and made £30,000 this year has no distributable profit, however good this year looks.
“Realised” excludes revaluation gains. If the balance sheet looks healthy because a property was revalued upwards, that uplift is not distributable.
Cash is not the test either. A company can be flush with money it owes HMRC and have nothing distributable.
Which accounts you measure it against
Section 836 answers this by reference to the “relevant accounts”. There are three possibilities:
| Accounts | When they are the relevant accounts | Section |
|---|---|---|
| Last annual accounts | The default — the standard accounts prepared under the Companies Act | s837 |
| Interim accounts | Where the last annual accounts would not support the distribution | s838 |
| Initial accounts | Where the company is in its first accounting reference period, or has not yet laid accounts for it | s839 |
For a private company the filing and audit conditions in sections 838 and 839 do not apply — they are public company requirements. A private company needs accounts good enough to allow a reasonable judgement about distributable profits under section 830. Management accounts from Xero, QuickBooks or FreeAgent, with an honest view on Corporation Tax and liabilities not yet posted, normally do the job.
Step 2: make the decision properly
Two kinds of dividend, decided by different people.
Final dividends are normally declared by the shareholders in general meeting, on the directors’ recommendation, and cannot exceed the amount the directors recommend.
Interim dividends are decided by the directors. Most owner-managed companies pay interim dividends throughout the year and never declare a final one.
Before deciding on an interim dividend, the directors must satisfy themselves that the company’s financial position warrants paying it out of profits available for distribution. That is where the section 830 test is applied.
GOV.UK’s own instruction is unambiguous: to pay a dividend you must hold a directors’ meeting to declare it and keep minutes of the meeting, even if you are the only director.
A one-director minute is short. Record the date, who was present, that the directors reviewed distributable profits and were satisfied they were sufficient, the amount per share and the class of share. Sign it and file it. Writing it a year later when HMRC asks is exactly what the minute exists to avoid.
Step 3: issue a dividend voucher
For each dividend payment the company makes, GOV.UK requires a voucher showing:
- the date
- the company name
- the names of the shareholders being paid a dividend
- the amount of the dividend
Give a copy to each recipient and keep one for the company’s records. That is the whole requirement — a single sheet of A4 per payment.
Dividends must usually be paid to all shareholders, in proportion to their holdings. On a 60/40 split of the same class of ordinary shares, a £10,000 dividend is £6,000 and £4,000 — paying yourself and not your co-shareholder is not a dividend.
A shareholder can formally waive a dividend, but only before it is paid. Repeated waivers in a family company can attract the settlements legislation, so take advice before relying on one.
Step 4: get the date right
The date a dividend is treated as paid is not always the date the money moves. For tax purposes a dividend is treated as paid on the date it becomes due and payable, and that depends on which kind it is.
| Type | Due and payable |
|---|---|
| Final dividend, no payment date specified | The date of the resolution — it creates an immediately enforceable debt |
| Final dividend, payable on a stated future date | That later date |
| Interim dividend | Only when actually paid — it can be varied or rescinded at any time before payment |
For interim dividends credited to a director’s loan account rather than paid in cash, payment happens when the money is unreservedly at the shareholder’s disposal — in practice, when the entries are made in the company’s books and the director can draw on them.
That is a trap. If the directors resolve on an interim dividend near the year end but the bookkeeping entries are not made until the accounts are prepared months later, the dividend falls into the later accounting period — and any attempt to land it in a particular tax year fails.
What happens if you get it wrong
A distribution made when the section 836 requirements are not met is unlawful. Under section 847, a shareholder who knew, or had reasonable grounds to believe, that it was unlawful must repay it — and HMRC’s guidance is explicit that in a private company controlled by directors who are also shareholders, that member ought to know, so section 847 applies in the majority of such cases.
The tax consequence follows. An unlawful dividend in a close company is treated as a loan to the shareholder under section 455 of the Corporation Tax Act 2010, triggering a Corporation Tax charge on the company. That charge is 35.75% for loans made, or benefits conferred, on or after 6 April 2026, and 33.75% for loans made between 6 April 2022 and 5 April 2026. Relief is available once the amount is repaid to the company.
So the cost of skipping a five-minute board minute is a Corporation Tax charge of more than a third of the payment, plus the obligation to repay it.
Frequently asked questions
Do I need board minutes if I am the only director?
Yes. GOV.UK is explicit that you must hold a directors’ meeting to declare the dividend and keep minutes of it, even if you are the only director. The minute is the evidence that the directors considered distributable profits before deciding, which is what the Companies Act requires.
Can I pay a dividend if the company has cash but no retained profit?
No. Section 830 of the Companies Act 2006 permits distributions only out of accumulated realised profits less accumulated realised losses. Cash in the bank is not the test — a company can hold money that belongs to HMRC in VAT and Corporation Tax and still have nothing available to distribute.
What has to be on a dividend voucher?
The date, the company name, the names of the shareholders being paid, and the amount of the dividend. Give a copy to each recipient and keep one for the company’s records. One voucher per dividend payment.
When is a dividend treated as paid for tax purposes?
A final dividend with no stated payment date is due and payable on the date of the resolution. A final dividend payable on a future date is due and payable on that date. An interim dividend is only due and payable when it is actually paid, which for a loan account credit means when the entries are made and the director can draw on the money.
What happens if I pay an unlawful dividend?
A shareholder who knew or should have known it was unlawful must repay it under section 847 of the Companies Act 2006. In a close company HMRC treats the amount as a loan to the shareholder under section 455 of the Corporation Tax Act 2010, giving the company a Corporation Tax charge of 35.75% for loans made on or after 6 April 2026, or 33.75% for loans made between 6 April 2022 and 5 April 2026.
Getting the paperwork done as a matter of routine
Most dividend problems are administrative rather than technical. The profit was there; nobody wrote the minute, or the entry was posted in the wrong period.
SmartFiling runs RTI payroll from £15 per employee per month, covering auto-enrolment, payslips, P60s and year-end returns, so the salary half of a director’s pay is documented correctly every month. Fixed fee, fully online, signed off by an ICAEW Chartered Accountant.
