Summary
Under the Companies Act 2006, companies are legally restricted in how they can distribute profits. Dividends can only be paid from realised profits, never from capital — regardless of what the company’s Articles of Association state. This fundamental rule, set out in Section 830, ensures that shareholder distributions are based on genuine, accumulated profits rather than eroding a company’s capital base.
For directors, business owners, and shareholders, understanding this restriction is critical. Paying dividends unlawfully — for example, from revaluations or when losses exceed reserves — can expose directors to personal liability, trigger HMRC tax consequences, and in some cases lead to repayments under Section 847 Companies Act.
In practice, this means companies must rely on their relevant accounts to determine distributable reserves. Final and interim dividends must both comply with the requirement to use realised profits, and additional safeguards apply to public companies, where the net asset test prevents distributions that would undermine capital maintenance.
For SMEs, scale-ups, and family-owned businesses, dividend planning needs to align with wider corporate tax planning, including Corporation Tax liabilities, close company rules under CTA 2010 s455, capital allowances, and R&D Tax Credits. By ensuring compliance, businesses can avoid the risks of illegal dividends while optimising cash flow and shareholder returns.
The Legal Framework: Companies Act 2006, Section 830
The cornerstone of UK company law on dividends is found in Section 830 of the Companies Act 2006. It provides a strict rule:
Dividends may only be paid out of profits available for distribution.
This means a company cannot lawfully distribute dividends simply because it has cash in the bank or strong asset values. Instead, the law requires an assessment of its distributable reserves, which are defined as:
-
Accumulated, realised profits (capital and revenue), not previously distributed or capitalised, minus
-
Accumulated, realised losses, unless already written off through a formal reduction or reorganisation of capital.
In simple terms, directors must look at the net position of realised profits and losses shown in the company’s accounts. If the net result is negative, dividends are unlawful — even if the company is otherwise cash-rich.
The “Balance Sheet Surplus” Method
HMRC guidance refers to this as the “balance sheet surplus” method: a company may only distribute what is shown as surplus on its balance sheet at the relevant time, based on the appropriate accounts.
-
For most companies, these will be the latest annual accounts filed.
-
For newer or growing SMEs, this may include interim accounts prepared to justify a dividend.
-
Public companies face an additional test — their net assets must not fall below the aggregate of called-up share capital and undistributable reserves.
Consequences of Ignoring Section 830
If directors authorise a dividend without checking distributable reserves:
-
The dividend may be deemed ultra vires (illegal).
-
Directors could face personal liability.
-
Shareholders who knew (or should have known) the dividend was unlawful may be required to repay it (Companies Act 2006, S.847).
-
HMRC may reclassify the payment as a loan to participants under CTA 2010 S.455, triggering a tax charge.
Profits vs Capital: Why Dividends Cannot Be Paid From Capital
One of the most important restrictions under UK company law is that dividends cannot be paid out of capital — even if a company’s Articles of Association appear to allow it. This principle, confirmed in Re Exchange Banking Ltd, Flitcroft’s case (1882) and later codified in the Companies Act 2006, is designed to protect creditors and maintain capital within the business.
Realised Profits vs Unrealised Profits
To determine whether a dividend is lawful, directors must distinguish between realised profits and unrealised profits:
-
Realised profits:
-
Trading profits from day-to-day operations.
-
Gains on the disposal of assets (e.g. selling property, machinery, or investments).
-
Other profits that have been crystallised and recorded in the accounts.
-
-
Unrealised profits:
-
Revaluations of property or assets (e.g. increasing the book value of land, buildings, or shares).
-
Fair value adjustments under IFRS or accounting standards.
-
These cannot normally be used to pay dividends, as they are not yet “real money” available to the company.
-
Using unrealised profits or capital reserves to declare dividends could result in an unlawful distribution, leaving directors personally exposed and potentially triggering repayment obligations for shareholders under Section 847 Companies Act 2006.
Why This Matters for SMEs and Scale-Ups
For SMEs, scale-ups, and family-owned companies, the temptation is often to extract cash as dividends when the business appears profitable. But unless those profits are realised and backed by accounts, the dividend may be illegal.
-
Directors’ duties: approving an unlawful dividend breaches fiduciary duties and may create personal liability.
-
Tax consequences: HMRC may treat unlawful dividends as loans to participators under CTA 2010 s455, triggering additional Corporation Tax charges.
-
Cash flow risks: paying dividends from non-distributable reserves weakens the company’s financial position and could harm future funding or growth.
Interim vs Final Dividends – Key Differences
Final Dividends
-
Declared by shareholders in a general meeting, usually at the recommendation of directors.
-
Cannot exceed the directors’ recommendation, ensuring shareholders do not over-distribute.
-
Once declared, a final dividend becomes an enforceable debt owed by the company to its shareholders.
-
The debt arises immediately (unless the resolution specifies a future payment date).
Example: A private company in Wimbledon with accumulated distributable profits declares a £50,000 final dividend at its AGM. Once declared, that dividend is a legal obligation, regardless of later trading performance. CIGMA’s tax advisors often help clients in similar situations ensure that dividends remain within the Companies Act 2006, Section 830 restrictions.
Interim Dividends
-
Declared by directors at board level, without needing shareholder approval.
-
More flexible – directors may rescind, vary, or cancel the interim dividend up to the date of payment.
-
Interim dividends only crystallise when actually paid or placed at the disposal of shareholders.
-
Case law: Potel v CIR (1971) confirmed that interim dividends do not create a debt until payment.
???? Example: Directors of a tech scale-up in Farringdon declare a £20,000 interim dividend in June. Before payment, updated accounts show a downturn. The board may lawfully rescind the dividend to protect reserves. At CIGMA Farringdon, we regularly guide scale-ups on whether interim dividends are the most appropriate route given their cash flow needs.
Practical Implications for SMEs and Public Companies
-
SMEs and family companies in South West London often prefer interim dividends for flexibility, especially when cash flow is uncertain.
-
Public companies typically declare final dividends at AGMs, aligning them with audited published accounts.
-
Tax implications: HMRC treats dividends as taxable income when they are paid or unreservedly placed at shareholders’ disposal (CTA 2010, s1000). For interim dividends, this is often later than the declaration date.
Risks of Getting It Wrong
-
Declaring final dividends without distributable reserves can create illegal distributions, triggering director liability under the Companies Act 2006.
-
Interim dividends that are paid despite insufficient realised profits may be reclassified by HMRC as loans to participators in close companies, leading to a CTA 2010 s455 charge.
At CIGMA Accounting Ltd, with offices in Wimbledon and Farringdon, our chartered accountants help clients structure dividends lawfully, balancing shareholder rewards with corporate tax planning and long-term business growth. We regularly advise SMEs, family-owned businesses, and scale-ups in London, Farringdon, Wimbledon, and Central London on the differences between final dividends and interim dividends under the Companies Act 2006. Understanding this distinction is essential for directors, as the timing, enforceability, and legal risks can directly affect both compliance and shareholder value.
Public Companies and Additional Restrictions
For public companies, the rules on dividends are even stricter than for private SMEs. Under Section 831 of the Companies Act 2006, directors must apply an additional safeguard to protect creditors and investors:
-
Net assets must not fall below the aggregate of called-up share capital and undistributable reserves once the dividend has been paid.
-
Undistributable reserves include:
-
The share premium account.
-
The capital redemption reserve.
-
The excess of accumulated unrealised or uncapitalised profits over unrealised losses.
-
Any other statutory or Article-based reserves that cannot legally be distributed.
-
This capital maintenance rule prevents erosion of shareholder protection and ensures that dividends are only paid when a company has sufficient reserves to support them.
Why This Matters for London-Based Public Companies
At CIGMA Accounting Ltd, our Central London and Wimbledon tax teams frequently advise companies, investment groups, and family investment companies (FICs) on the Section 831 net assets test. This test is especially relevant for:
-
City of London financial services firms are managing complex reserves.
-
South West London investment companies are balancing share premium accounts with ongoing capital projects.
-
Scale-ups considering an IPO in London, where dividend policy must be aligned with shareholder expectations and regulatory compliance.
Failing the Section 831 test could result in an unlawful dividend, exposing directors to personal liability and requiring repayment from shareholders who knew (or should have known) the dividend was unlawful.
Strategic Tax & Compliance Planning
Our role at CIGMA Accounting goes beyond statutory compliance. We integrate dividend planning for public companies with wider corporate tax advisory, including:
-
Corporation Tax optimisation.
-
Capital allowances and tax reliefs to support reserves.
-
R&D tax credits to enhance distributable profits.
-
HMRC compliance reviews to safeguard against challenges.
With offices in Farringdon and Wimbledon, CIGMA’s chartered accountants provide tailored dividend planning for both private and public companies — ensuring that distributions are not only legal, but also aligned with long-term growth and shareholder value.
Ultra Vires and Illegal Dividends
Declaring dividends without sufficient distributable reserves is not just a technical mistake — it can amount to an unlawful distribution and a serious breach of directors’ duties under the Companies Act 2006. At CIGMA Accounting Ltd, our advisors in Farringdon and Wimbledon regularly help SMEs, scale-ups, and public companies avoid these pitfalls by carefully reviewing accounts before distributions are made.
Shareholder Repayment Obligations
Under Section 847 Companies Act 2006, shareholders who knew or ought to have known that a dividend was unlawful may be required to repay it to the company.
-
Innocent recipients (e.g. shareholders of a listed company) may be protected.
-
In closely-held companies, directors who are also shareholders are usually expected to know, and therefore repayment obligations often arise.
???? Example: A family-owned company in South West London pays a dividend despite accumulated losses. HMRC challenges the legality, and shareholders who were also directors must repay the distribution.
Directors’ Liability
Directors who authorise unlawful dividends can be held personally liable for breach of duty. This risk applies even where shareholders consented, because statutory law overrides Articles of Association.
-
Liability may extend to restoring funds to the company.
-
In insolvency scenarios, wrongful dividend payments can expose directors to claims from liquidators and creditors.
Tax Implications – CTA 2010, Section 455
Where dividends are found to be unlawful:
-
HMRC may reclassify the payment as a loan to participators in a close company.
-
This triggers a Section 455 CTA 2010 charge, currently at 33.75% of the loan value.
-
Relief may be available if the funds are repaid, but this can damage cash flow and invite HMRC scrutiny.
Related article: Close company loans and s455 tax charges.
Why London Businesses Must Be Careful
For SMEs in Farringdon’s tech sector, professional practices in Wimbledon, and HNW family investment companies in Central London, unlawful dividends can undermine not only compliance but also corporate reputation and shareholder trust.
At CIGMA Accounting, we integrate dividend planning into broader corporate tax strategies, combining:
-
Corporation Tax reviews.
-
Capital allowances to strengthen reserves.
-
R&D tax credit claims to boost profits available for distribution.
-
HMRC compliance checks to protect directors from risk.
Dividend Waivers and Uncashed Dividends
Dividend planning is not always straightforward. At CIGMA Accounting Ltd, we often advise directors and shareholders across Farringdon, Wimbledon, and Central London on two complex but common issues — dividend waivers and uncashed dividends. Both carry important legal and tax considerations under the Companies Act 2006 and HMRC guidance.
Dividend Waivers
A dividend waiver allows a shareholder to voluntarily give up their right to receive a dividend. However, strict rules apply:
-
Waivers are only valid if executed before the dividend is declared or paid.
-
A late waiver is ineffective and may be treated as an assignment of income, creating exposure under the settlements legislation (ITTOIA 2005, Part 5, Chapter 5).
-
Improperly drafted waivers can lead HMRC to challenge the arrangement, especially if they appear motivated solely by tax avoidance.
Example: A director-shareholder in Wimbledon executes a waiver after the dividend is paid. HMRC may treat the payment as still due, triggering unintended Income Tax liabilities.
At CIGMA, our corporate tax team ensures waivers are structured lawfully and do not jeopardise either company compliance or the shareholders’ tax position.
Uncashed Dividends
Sometimes dividends are declared but left uncashed by shareholders. In such cases:
-
Shareholders generally have six years to claim payment under the Limitation Act 1980.
-
For listed companies under London Stock Exchange rules, the period extends to twelve years.
-
After this period, the right to claim may lapse, and the company may re-credit the funds to reserves.
Example: A shareholder of a Central London listed company forgets to cash dividend warrants issued in 2012. Under LSE rules, they still had until 2024 to claim, but the right has now expired.
For SMEs and family-owned businesses, uncashed dividends may complicate bookkeeping, loan accounts, and HMRC reporting. At CIGMA Accounting Ltd, we guide companies on best practice for managing these situations, ensuring compliance and clarity in shareholder records.
Takeaway: Dividend waivers and uncashed dividends may seem minor administrative points, but mishandling them can create legal, tax, and compliance risks. With offices in Farringdon and Wimbledon, CIGMA Accounting Ltd provides bespoke dividend planning advice to ensure shareholders and directors stay on the right side of company law and HMRC guidance.
Practical Checklist for Directors
Ensuring dividends are lawful and tax-efficient is ultimately the responsibility of directors. At CIGMA Accounting Ltd, we provide directors in Farringdon, Wimbledon, and across Central and South West London with practical frameworks to avoid the risks of unlawful distributions and to align dividend policy with wider corporate tax strategy.
Here’s a step-by-step checklist every board should follow:
Confirm Distributable Profits
-
Always verify distributable reserves using the latest annual accounts or properly prepared interim accounts.
-
If the company is new, prepare initial accounts in line with Section 839 Companies Act 2006.
-
CIGMA’s London advisors often help SMEs prepare interim accounts to justify dividend payments mid-year.
Avoid Reliance on Unrealised Profits
-
Dividends cannot be paid from capital or revaluations.
-
Unrealised gains under IFRS or property revaluations are excluded unless converted into realised profits.
-
At CIGMA Wimbledon, we frequently support property investors and family investment companies in distinguishing realised vs unrealised profits before distributions.
Check Public Company Capital Maintenance Rules
-
For public companies, apply the net assets test under Section 831 Companies Act 2006.
-
Ensure net assets remain above called-up share capital + undistributable reserves after the dividend.
-
CIGMA’s Central London tax team works closely with listed companies and pre-IPO scale-ups to ensure dividend compliance with capital maintenance.
Maintain Proper Records
-
Keep clear board minutes and resolutions for every dividend declaration (final or interim).
-
Proper documentation not only proves compliance but also protects directors if HMRC or auditors raise questions.
Factor in HMRC Guidance & Tax Consequences
-
Remember that HMRC treats dividends as taxable when paid or placed at shareholders’ disposal.
-
Unlawful dividends may be reclassified as loans to participators under CTA 2010 s455, triggering a tax charge.
-
At CIGMA Farringdon, we often review dividend policies as part of broader Corporation Tax planning to avoid such traps.
Seek Professional Advice for Complex Cases
-
When cash flow, reserves, or reliefs (e.g. R&D Tax Credits or Capital Allowances) overlap with dividend policy, seek expert guidance.
-
A well-structured dividend plan can:
-
Improve cash flow management.
-
Avoid illegal distributions.
-
Optimise shareholder returns while safeguarding compliance.
-
CIGMA’s Role
At CIGMA Accounting Ltd, we help SMEs, scale-ups, and high-net-worth directors across London:
-
Determine when dividends can legally and tax-efficiently be paid.
-
Integrate dividend planning with corporation tax, capital allowances, and R&D claims.
-
Avoid risks of illegal distributions and s455 loan charges.
-
Ensure compliance with Companies Act 2006 and HMRC requirements.
With offices in Farringdon and Wimbledon, our chartered accountants provide bespoke business tax planning UK, safeguarding your company’s financial health while optimising shareholder value.
FAQs on Dividends – Companies Act & HMRC Guidance
At CIGMA Accounting Ltd, our chartered accountants in Farringdon and Wimbledon frequently answer directors’ and shareholders’ questions about dividend legality, timing, and tax treatment. Below are some of the most common queries we receive from SMEs, scale-ups, and HNW clients across Central and South West London.
Q1: Can directors declare dividends without shareholder approval?
Answer:
-
Interim dividends may be declared by directors at board level without shareholder approval.
-
Final dividends, however, must be approved by shareholders in a general meeting, and cannot exceed the directors’ recommendation.
At CIGMA Accounting firm in Farringdon, we often help scale-ups document interim dividends properly to avoid disputes or HMRC challenges.
Q2: What happens if dividends are paid without profits available for distribution?
Answer:
Dividends paid without sufficient distributable reserves are unlawful under Section 830 Companies Act 2006.
-
Directors may be held personally liable.
-
Shareholders who knew (or should have known) may have to repay the dividend under Section 847.
-
HMRC may reclassify the payment as a loan to participators in close companies, triggering a CTA 2010 s455 charge.
Our CIGMA tax firm Wimbledon office often advises family businesses on ensuring sufficient reserves before declaring dividends.
Q3: Are dividends taxable if they remain uncashed?
Answer:
Yes — dividends are taxable when they are paid or unreservedly placed at the shareholder’s disposal, not just when cashed.
-
For practical purposes, HMRC considers dividends taxable at the time the shareholder has access (e.g. credited to a loan account).
-
Uncashed dividends may still remain claimable for up to six years (Limitation Act 1980), or twelve years for listed companies under LSE rules.
At CIGMA Accounting firm, we help directors maintain proper records so that tax reporting aligns with HMRC expectations.
Q4: Can dividends be paid out of revaluation reserves or capital gains?
Answer:
-
Revaluation reserves and unrealised gains cannot generally support dividends.
-
Only realised profits (e.g. trading profits, disposals of assets) may be distributed.
-
Attempting to use revaluation gains could result in illegal dividends and director liability.
Our CIGMA Tax Team Central London tax team often works with property investors and FICs to ensure capital gains are treated correctly before dividend extraction.
Q5: Can dividends be waived?
Answer:
Yes, but only if the waiver is executed before payment. Late waivers are ineffective and may create settlement legislation issues (ITTOIA 2005). HMRC may view them as an assignment of income.
At CIGMA Accounting, we draft and review waiver agreements for directors and shareholders to avoid future HMRC disputes.
Q6: How do dividends interact with Corporation Tax planning?
Answer:
While dividends are not deductible for Corporation Tax, they must be considered within wider planning strategies:
-
Claiming R&D tax credits or capital allowances can boost distributable reserves.
-
Dividends must be aligned with the company’s cash flow and tax position to avoid over-distribution.
Our CIGMA tax advisors in Farringdon and Wimbledon integrate dividend planning into bespoke corporate tax strategies for SMEs and HNWs.Why Work With CIGMA on Dividend Planning
With offices in Farringdon and Wimbledon, CIGMA Accounting Ltd is the trusted partner for SMEs, scale-ups, and high-net-worth individuals in London seeking expert guidance on dividends. From compliance with Companies Act 2006 to HMRC tax treatment, we ensure your dividend strategy is:
-
Legally compliant
-
Tax-efficient
-
Aligned with long-term growth and shareholder value
