For many owner-managed companies, dividends are the main way the owners take money out of the business. They can be tax efficient, but they are also tightly regulated. A dividend paid without enough distributable profits, or without following the right procedure, is unlawful, and shareholders and directors can be made to repay it. This guide explains what directors need to check before paying a dividend, how to document it properly and what happens if it goes wrong.
In brief
- A company can only pay dividends out of distributable profits: its accumulated realised profits, less its accumulated realised losses.
- Directors must justify every dividend by reference to accounts and must also be satisfied the company can afford it.
- Interim dividends are usually decided by the directors; final dividends are declared by the shareholders on the directors’ recommendation.
- Every dividend should be backed by board minutes, a shareholder resolution where needed and a dividend voucher.
- From 6 April 2026, dividend tax rates are 10.75%, 35.75% and 39.35%, above a £500 dividend allowance.
What is a dividend?
A dividend is a payment a company makes to its shareholders out of its profits. Unlike salary, it is not a business expense, so it does not reduce the company’s Corporation Tax bill, but it does not attract National Insurance either. That is why many owner-managers take a modest salary and top it up with dividends. There are two main types:
| Interim dividend | Final dividend | |
|---|---|---|
| Who decides? | The directors | The shareholders, by ordinary resolution, on the directors’ recommendation |
| When? | At any time during the financial year | Usually after the annual accounts are prepared |
| Can it be changed? | Directors can usually vary or cancel it until it is paid | Becomes a debt owed to shareholders once declared |
| Limit | Must be justified by the relevant accounts | Cannot exceed the amount the directors recommend (under the Model Articles) |
Six checks before paying a dividend
1. Are there enough distributable profits?
Under section 830 of the Companies Act 2006, a company may only make a distribution out of profits available for the purpose. Broadly, that means its accumulated realised profits, so far as not previously distributed, less its accumulated realised losses. Profits from this year alone are not the test: losses brought forward from earlier years must be made good first.
2. Which accounts justify the dividend?
The directors must be able to point to accounts that show enough distributable profits. These are normally the company’s last annual accounts. If those do not show enough, or the dividend is paid in the company’s first accounting period, the directors need interim accounts or initial accounts that give a reasonable view of the company’s current position.
3. Can the company actually afford it?
Having distributable profits on paper is not enough. The directors must look at the company’s position now and after the payment, including its cash, upcoming liabilities and trading outlook. If paying the dividend would leave the company unable to pay its debts as they fall due, it should not be paid. Where the company is in financial difficulty, the directors must also give proper weight to the interests of creditors, and early insolvency and director advice is essential.
4. What do the Articles say?
The company’s Articles of Association may set out who can declare dividends and how. They may also give different classes of share different dividend rights. Dividends on a single class of shares must normally be paid in proportion to each shareholding, so paying different amounts to different shareholders requires separate share classes. Our guide to tailored Articles of Association explains how share classes work, and a shareholders’ agreement can set a dividend policy that everyone has agreed to.
5. Have the directors considered their duties?
Declaring a dividend is a board decision like any other. Directors must act within their powers, promote the success of the company for the benefit of its members as a whole and exercise reasonable care, skill and diligence. A director who will receive the dividend as a shareholder should declare that interest, even where every director is also a shareholder.
6. Is there a waiver or anything unusual?
If a shareholder does not want to receive a dividend, a dividend waiver must normally be signed before the right to the dividend arises. HMRC looks closely at waivers that shift income to family members, so take tax advice before using one.
Documenting the dividend
Good paperwork is the best evidence that a dividend was lawful. For each dividend, keep:
- Board minutes recording the accounts relied on, the distributable profits available, the directors’ assessment of solvency and the amount per share
- A shareholder resolution for a final dividend, passed at a general meeting or as a written resolution
- A dividend voucher for each shareholder, showing the company name, the date, the shareholder’s name, the number of shares and the amount paid
- Evidence of payment, so it is clear the dividend was paid rather than left owing on a director’s loan account
What happens if a dividend is unlawful?
Unlawful dividends usually come to light when a company runs into trouble, because a liquidator or administrator will review payments made to shareholders in the years before insolvency.
- Shareholders who knew, or had reasonable grounds to believe, that the dividend was unlawful must repay it under section 847 of the Companies Act 2006. Where a shareholder is also a director, it is very hard to argue they did not know.
- Directors who authorised an unlawful dividend can be personally liable to repay it to the company for breach of duty, even if they did not receive it themselves.
- Tax. HMRC may challenge the tax treatment of payments that were not valid dividends, for example treating them as salary or loans.
If you are concerned about dividends that have already been paid, take advice early. It is often possible to regularise the position, for example by preparing interim accounts, before the issue becomes a claim. Disagreements over dividend policy are also a common trigger for shareholder disputes.
How dividends are taxed
Dividends are paid out of profits that have already borne Corporation Tax. Shareholders then pay income tax on dividends above the £500 dividend allowance. From 6 April 2026, the dividend tax rates are:
| Income tax band | Dividend tax rate |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Scotland has its own income tax rates for earnings and self-employed profits, but dividends are taxed at the UK dividend rates above, whether or not you are a Scottish taxpayer. That difference is one reason the balance between salary and dividends can look different for Scottish directors. Your accountant should model the mix each year, and our guide to choosing a business structure in Scotland explains how this fits into the wider decision.
Frequently asked questions
Can a company pay a dividend if it made a loss this year?
Possibly. The test is accumulated realised profits less accumulated realised losses, so a company with enough retained profits from earlier years may still pay a dividend despite a loss this year, provided it can afford it.
How often can a company pay dividends?
There is no legal limit. Many owner-managed companies pay interim dividends monthly or quarterly. Each one must be justified by the relevant accounts and properly minuted.
Can different shareholders receive different dividends?
Only if they hold different classes of share with separate dividend rights, or a shareholder has validly waived their dividend. Within one class, dividends are paid in proportion to the shares held.
Do I need a dividend voucher?
Yes, in practice. A voucher records the payment for the shareholder’s tax return and is good evidence that a dividend, rather than salary or a loan, was paid.
What if dividends were paid without enough profits?
The dividend is unlawful and may have to be repaid by the shareholders and directors involved. Speak to a solicitor and your accountant promptly, as acting early gives the most options for putting things right.
Need advice on dividends?
Our business solicitors advise directors and shareholders across Scotland on dividend procedure, share classes, dividend policies and putting right past payments, working alongside your accountant. Call 0141 471 9166 or book a free consultation.
Related services and guides
This guide reflects the Companies Act 2006 and UK tax rules as at October 2026. It is general information rather than legal or tax advice, so please speak to us and your accountant before relying on it.