Can I Pay Dividends if My Company Makes a Loss?

April 6, 2025 • 6 min read

A common question during tough trading years is: "I have money in the business bank account; can I take a dividend even though we made a loss this year?"

The answer depends on one crucial figure: Retained Earnings.

The Golden Rule: Distributable Profits

You can legally pay dividends only if you have sufficient "Distributable Profits". Distributable Profits = Accumulated Profits (from all years) - Accumulated Losses.

It does not matter if you have cash in the bank. Cash is not profit. Cash could be from a bounce-back loan, a VAT bill you haven't paid yet, or a customer deposit.

Scenario A: Current Year Loss, but Historic Profit

Year 1 Profit: £50,000 (Retained)
Year 2 Loss: -£10,000
Total Distributable Profit: £40,000.
Result: ✅ You CAN legally pay up to £40,000 in dividends.

Scenario B: Current Year Profit, but Historic Loss

Year 1 Loss: -£50,000
Year 2 Profit: +£20,000
Total Distributable Profit: -£30,000.
Result: ❌ You CANNOT pay dividends, even though you made money this year. You must fill the "hole" from Year 1 first.

What is an "Ultra Vires" (Illegal) Dividend?

If you pay a dividend without sufficient profit, it is classified as Ultra Vires (beyond powers).

The Consequences

Reclassification to Loan: HMRC may treat the payment as a Director's Loan.
S455 Tax: If not repaid within 9 months of year-end, the company pays 33.75% tax on the loan.
Insolvency Risk: If the company goes bust, the liquidator will demand you repay this money personally. It is not protected by "Limited Liability" because it was taken illegally.

What To Do If You Are In Loss

If you cannot pay dividends involving profits, you must pay yourself a Salary.

Salary is a business expense. It can be paid even if the company makes a loss (increasing the loss).
However, salary attracts National Insurance and Income Tax.

Summary Checklist

Before declaring a dividend:

Run up-to-date management accounts.
Deduct estimated Corporation Tax.
Check the "Retained Earnings" line on the Balance Sheet.
Ensure it is positive and covers the dividend amount.

Disclaimer: Always document your dividend declaration with a Board Minute/Voucher.