A cumulative preference share carries a fixed dividend which, if it is not paid in a year, rolls forward as arrears that must normally be cleared before ordinary shareholders receive anything. The arrears are not a debt of the company: they can only be paid when there are enough distributable profits and the dividend is properly declared or paid under the articles.

What makes a preference dividend cumulative?

HMRC’s Corporate Finance Manual at CFM11020 describes preference shares as carrying a right to a fixed dividend, paid before the ordinary shareholders receive theirs, and cumulative preference shares as allowing the holder to be paid in a later year a dividend that could not be met in an earlier year. Nothing in the Companies Act 2006 creates the right. It comes from the articles or the terms on which the shares were issued, which should state the rate, the amount it applies to, the payment dates, whether unpaid amounts carry forward, and whether they compound.

If a preference share is non cumulative, a missed dividend is simply lost. If it is cumulative, each missed payment adds to the arrears, and the whole amount ranks ahead of later dividends on junior classes. Article 30(3) of the model articles for private companies, in Schedule 1 to SI 2008/3229, requires every dividend to be declared or paid in accordance with shareholders’ respective rights, so the preference terms bind the board whenever it considers a dividend on any class. For an overview of how classes differ, see share classes.

Are arrears a debt the company owes?

No. A company may only make a distribution out of profits available for the purpose (section 830), so a fixed dividend right cannot force a payment when there are no distributable profits. HMRC’s Company Taxation Manual at CTM15205 explains that a final dividend becomes an enforceable debt when it is properly declared, or on any later payment date the resolution sets, whereas an interim dividend can be varied or rescinded at any time before it is paid. Until one of those things happens, a holder of cumulative preference shares has a priority right, not a claim for money.

Even a declared but unpaid dividend ranks behind outside creditors if the company goes into liquidation. Section 74(2)(f) of the Insolvency Act 1986 says a sum due to a member in their character as a member, by way of dividends or otherwise, is not treated as a debt payable to that member in competition with creditors who are not members. Whether undeclared arrears are paid out of any surplus in a solvent winding up depends on the wording of the share rights, so read the articles closely.

When can the arrears be paid?

Arrears can be paid whenever the company has enough profits available, measured from its relevant accounts under section 836, and the proper decision is taken. The model articles add three rules that apply where a company has adopted them unamended:

  • Article 30(5): if share capital is divided into classes, no interim dividend may be paid on shares with deferred or non preferred rights while any preferential dividend is in arrear.
  • Article 30(6): the directors may pay a fixed rate dividend at intervals if the profits available for distribution justify it.
  • Article 30(7): directors acting in good faith are not liable to preference holders for loss caused by the lawful payment of an interim dividend on deferred or non preferred shares.

In practice that means the ordinary shareholders wait. Under typical terms the arrears must be cleared before any dividend goes to the ordinary class. Many bespoke articles go further, for example giving preference holders votes while dividends are in arrear or making unpaid amounts accrue interest. Those terms override the general position.

How are arrears shown in the accounts?

Medium and large companies preparing Companies Act accounts must disclose arrears. Paragraph 62 of Schedule 1 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 requires the amount of any fixed cumulative dividends in arrear, and the period for which each class is in arrear, to be stated. The arrears are not recognised as a liability: under FRS 102 paragraph 32.8, even a dividend declared after the reporting date is not a liability at that date.

The classification of the shares themselves can change the picture. ICAEW and ICAS guidance TECH 02/17BL notes at paragraph 6.62 that under IAS 32 redeemable preference shares with non discretionary cumulative dividends are a liability, with the dividend accrued as an interest charge, and at paragraph 6.64 that presenting the shares as debt has no effect on the company’s realised profits for distribution purposes. The FRS 102 analysis is covered in debt or equity: classifying preference shares.

How are arrears taxed when they are finally paid?

For an individual holder, income tax is charged on dividends paid in the tax year (section 384 of the Income Tax (Trading and Other Income) Act 2005). Arrears covering several years are therefore taxed in the year they are actually paid, which can push a holder into a higher dividend rate band in a single year. The current rates and allowance are set out in dividend allowance and tax rates. For a company holder, the charge on dividends received and its exemptions are in Part 9A of the Corporation Tax Act 2009.

Compounding terms can have a less obvious effect. HMRC’s Company Taxation Manual at CTM00514 records the Upper Tribunal’s decision in HMRC v Stephen Warshaw [2020] UKUT 0366 (TCC) that preference shares carrying a cumulative dividend which compounds on unpaid amounts are not shares with a right to a dividend at a fixed rate, and so are ordinary share capital. A simple cumulative 10% share is not affected by being cumulative. Because the 5% personal company test for business asset disposal relief in section 169S of the Taxation of Chargeable Gains Act 1992 looks at ordinary share capital, compounding preference shares can dilute or boost a shareholder’s percentage. See business asset disposal relief.

How might the arithmetic work?

Illustration only. A company has 100,000 £1 cumulative preference shares carrying a fixed 6% dividend, payable annually, with no compounding. Trading losses mean no dividends are paid for three years.

Year Dividend due Paid Arrears carried forward
1 £6,000 £0 £6,000
2 £6,000 £0 £12,000
3 £6,000 £0 £18,000
4 £6,000 £24,000 £0

In year 4 the company returns to profit and has £40,000 of distributable reserves. Under typical terms, before any ordinary dividend can be paid the £18,000 of arrears and the £6,000 for the current year must be paid, leaving £16,000 for the ordinary shareholders, subject to the directors’ wider judgment about cash and creditors. If the company is medium sized, its accounts for years 1 to 3 should have disclosed the arrears and the period they relate to. A preference holder who is an individual is taxed on the whole £24,000 in the tax year it is paid.

What mistakes come up in practice?

  • Paying an interim dividend on ordinary shares while preference dividends are unpaid, in breach of article 30(5) or the bespoke equivalent.
  • Treating arrears as a creditor in the balance sheet, or recording them as owed to the holder in a loan account before any dividend is declared.
  • Paying arrears without checking distributable reserves, which makes the payment unlawful just as for any other dividend; see how to pay dividends legally.
  • Missing the disclosure of arrears in medium or large company accounts.
  • Overlooking compounding or interest terms that change the amount due and, after Warshaw, the tax character of the shares.
  • Assuming undeclared arrears will be paid on a winding up without checking the articles.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.