Can a company pay a dividend after a loss making year

Q: What mistakes come up after a loss making year?

Looking only at this year's profit and loss account. A loss does not ban dividends, and a profit does not guarantee them; the accumulated position decides. Forgetting earlier dividends. Interim dividends already paid against the same accounts count towards the limit under section 840. Counting a revaluation reserve. Unrealised gains do not fund dividends. Relying on old accounts. Using last year's healthy accounts while knowing losses have since eroded reserves breaches capital maintenance principles. Keeping up monthly dividends on autopilot. ICAEW's helpsheet on illegal dividends says that where interim dividends were properly substantiated when paid and profitability only deteriorated later, liability to repay would not normally arise. Payments made after the losses were apparent are a different matter. If a dividend has already been paid without enough reserves, see how to put right an unlawful dividend and director liability for unlawful dividends. Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant's fees with Solar Protect. Read how our cover works or get a quote.

Often, yes. A company can pay a dividend after a loss making year as long as its accumulated realised profits, less its accumulated realised losses, are still positive once that loss is counted. Section 830 of the Companies Act 2006 looks at the company’s whole trading history, so a bad year shrinks the amount available for distribution rather than shutting it off.

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Why does one bad year not automatically stop a dividend?

Section 830(1) of the Companies Act 2006 says a company may only make a distribution out of profits available for the purpose. Section 830(2) then defines those profits as the company’s accumulated, realised profits, so far as not already distributed or capitalised, less its accumulated, realised losses, so far as not written off in a proper reduction or reorganisation of capital. Section 853(2) adds that references to profits and losses mean profits and losses made at any time.

HMRC’s Company Taxation Manual at CTM15205 makes the same point in plain terms: the word “accumulated” means the current year’s position cannot be taken in isolation. The GOV.UK guidance for limited companies puts it as a company must not pay out more in dividends than its available profits from current and previous financial years.

So the question is never “did we make a profit this year?” It is “after this year’s loss, is there still a positive balance of realised profits?” A company with healthy retained earnings from earlier years can absorb a loss and still pay a dividend. A company that was only just in credit may find the loss has used up everything.

How do you work out what is left after the loss?

Start from the realised profit reserve brought forward, take off the loss for the year after tax, and take off any dividends already paid or declared against the same accounts. Section 840 requires earlier distributions made by reference to the same relevant accounts to be added to the proposed one when testing it. Then strip out anything that is not a realised profit. CTM15205 confirms that an unrealised profit arising on a revaluation of assets is not a realised profit, so a revaluation reserve cannot fund a dividend. Share premium is not a profit at all. The page on distributable reserves covers the full calculation.

Illustration only. Three small companies each make a loss after tax of £30,000 in their latest year.

Company	Realised profits brought forward	Loss for the year	Balance after the loss	Maximum lawful dividend
A	£80,000	£30,000	£50,000	£50,000
B	£20,000	£30,000	£10,000 deficit	Nil
C	£5,000 plus a £100,000 revaluation reserve	£30,000	£25,000 deficit on realised profits	Nil

Company A can still pay up to £50,000, subject to solvency and cash. Company B cannot pay anything until the £10,000 deficit has been made good. Company C has net assets that look comfortable on the balance sheet, but the revaluation reserve is unrealised, so the realised position is a deficit and no dividend is possible.

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Which accounts decide the answer?

Section 836 says lawfulness is judged by reference to profits, losses, assets, liabilities, provisions, share capital and reserves as stated in the “relevant accounts”. Normally these are the last annual accounts, which section 837 defines as the individual accounts last circulated to members under section 423. They must have been properly prepared, and if they were audited the auditor must have reported on them. If any applicable requirement is not met, section 836(4) treats the distribution as contravening Part 23.

Timing is where people go wrong. Until the loss making year’s accounts are circulated, the previous year’s accounts remain the last annual accounts and may show plenty of reserves. That does not mean the loss can be ignored. ICAEW’s introduction to the law on dividends explains that the common law on capital maintenance looks at the position at the time of the dividend, so directors should not pay a dividend out of distributable profits that have since been lost. ICAEW’s guide for directors of small companies says the same: if the realised profits in the accounts have been reduced by later losses, a dividend cannot be paid out of them to that extent. The page on relevant accounts for a distribution explains how these rules fit together.

Can profits made since the year end rescue the position?

Yes. Section 836(2)(a) allows a distribution that would contravene Part 23 by reference to the last annual accounts to be justified by interim accounts instead. For a private company, section 838(1) only requires interim accounts that enable a reasonable judgment to be made of the relevant profits, losses, assets, liabilities, provisions and reserves. Public companies face extra conditions, including signing the balance sheet and delivering a copy of the interim accounts to the registrar under section 838(5) and (6).

ICAEW’s guidance notes that management accounts can be used for this, but they will usually need adjusting for tax on profits to date and for items that statutory accounts would include, such as impairments.

Illustration only. Company B above ended its year with a £10,000 deficit. In the six months after the year end it makes a profit after tax of £25,000. Properly prepared interim accounts would show realised profits of £15,000, so a dividend of up to £15,000 could be justified, even though the annual accounts on their own would not support any dividend. HMRC’s CTM15205 notes that a dividend properly based on interim accounts remains lawful even if the later annual accounts show insufficient profits.

What else must the directors weigh up after a loss?

Having distributable profits on paper is not enough. ICAEW’s introduction to the law on dividends says directors’ duties require them, before recommending or paying a dividend, to consider whether the company will remain solvent and able to pay its debts as they fall due afterwards, judged against its current and likely future position. Where a company is insolvent or likely to become insolvent, the duty to promote its success for the shareholders changes to a duty to consider or act in the interests of creditors.

A loss is often a warning sign. Directors should ask whether trading has stabilised, whether the loss came from a one off cost or an ongoing problem, whether loans fall due soon and whether paying cash out now would leave the business short. ICAEW’s guide for directors points to cash flow and loan repayment obligations as practical reasons not to pay even where profits are available.

Does the type of company change the test?

For a public company, section 831 adds a net assets test. The company may only make a distribution if its net assets are not less than its called up share capital plus undistributable reserves, and only to the extent the distribution does not take net assets below that figure. Undistributable reserves include share premium, the capital redemption reserve and the excess of unrealised profits over unrealised losses.

For groups, ICAEW’s guide stresses that profits available for distribution are worked out company by company from that company’s own accounts. If a company has accumulated losses it cannot pay a dividend even when the group as a whole is profitable.

A tax loss is a different thing from an accounting loss. Distributable profits are measured from the accounts, so a trading loss carried forward for corporation tax does not by itself reduce, or increase, what can be paid out.

What if the deficit is likely to last?

A company in deficit has three broad routes. It can wait until later profits restore the reserve, using interim accounts if it wants to pay part way through a year. It can pay its owner managers through salary rather than dividends for a period; the comparison is covered in salary versus dividends. Or, if it has share capital or share premium to spare, a private company can reduce its share capital by special resolution supported by a solvency statement under section 641(1)(a), which can be used to eliminate the deficit; see reduction of share capital.

What a company cannot do is take money out and call it a dividend anyway. The Insolvency Service’s director information hub says that dividends paid when the company does not have sufficient profits will usually be treated as a director’s loan and must be repaid.

What mistakes come up after a loss making year?

Looking only at this year’s profit and loss account. A loss does not ban dividends, and a profit does not guarantee them; the accumulated position decides.
Forgetting earlier dividends. Interim dividends already paid against the same accounts count towards the limit under section 840.
Counting a revaluation reserve. Unrealised gains do not fund dividends.
Relying on old accounts. Using last year’s healthy accounts while knowing losses have since eroded reserves breaches capital maintenance principles.
Keeping up monthly dividends on autopilot. ICAEW’s helpsheet on illegal dividends says that where interim dividends were properly substantiated when paid and profitability only deteriorated later, liability to repay would not normally arise. Payments made after the losses were apparent are a different matter.

If a dividend has already been paid without enough reserves, see how to put right an unlawful dividend and director liability for unlawful dividends.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.