Declaring dividends: profits, approvals and dividend vouchers

Check distributable profits, not just cash

Distributable profits are a legal and accounting concept based on accumulated realised profits less accumulated realised losses. A bank balance can include loan proceeds, VAT, share subscriptions and cash needed to meet liabilities. None of those proves that a dividend can be paid. Conversely, profitable accounts do not mean cash is available to pay a dividend safely today.

Use appropriate relevant accounts to establish the reserves, including current information where older annual accounts do not support the proposal. Account for losses, tax and other liabilities rather than taking a headline profit number from sales software. The board should also consider solvency and future obligations. An accountant can help prepare reliable interim figures before a material payment.

Read the share rights before choosing recipients

Dividends must follow the rights attached to the shares. Shareholders in the same class normally receive dividends proportionately to their holdings under those rights. Paying a working founder more than a passive investor merely because the founder worked harder does not make the extra amount a lawful dividend. Salary, bonus and shareholder distributions have different bases.

Different share classes, preference rights or dividend waivers need careful legal and tax handling. Do not create a retrospective waiver or rename a withdrawal after payment to fit a desired tax result. Review the articles, shareholder agreement and any arrears of preferential dividends before approval. Connected-person arrangements can raise additional tax questions.

• Check the register of members and each class’s dividend rights.
• Confirm any preference or investor consent provisions.
• Distinguish reward for employment from return on ownership.
• Seek advice before waivers or changes to share classes.
• Do not use dividends to conceal an overdrawn loan account.

Follow interim or final dividend procedures

Under typical model articles, directors may decide to pay interim dividends, while shareholders can declare final dividends by ordinary resolution up to the amount directors recommend. The actual articles govern the company’s procedure. A sole-director and sole-shareholder company still needs a record; simplicity of ownership does not remove the need to evidence decisions and profits.

Record the amount, rights, recipients, basis of accounts and relevant dates. Interim and final dividends can have different legal and tax timing, especially when a dividend is credited to a loan account instead of paid through the bank. Ask the accountant to confirm treatment for the chosen process rather than assuming the resolution date always fixes personal tax timing.

1. 1

   Prepare reliable accounts and determine available distributable reserves.

2. 2

   Review share rights, constitution and investor permissions.

3. 3

   Assess cash needs, tax liabilities and solvency.

4. 4

   Approve the appropriate interim or final dividend.

5. 5

   Prepare vouchers and record the actual payment or account credit.

6. 6

   Reconcile company records and each shareholder’s tax reporting.

Create a useful dividend voucher

A dividend voucher should identify the company, recipient, payment date and amount. Retain a company copy and provide a copy to the shareholder. Add the company number, share class or other identifying detail where useful so the payment can be matched to the approval and ownership record. A voucher should describe an actual supported dividend, not manufacture evidence for an undocumented withdrawal.

Keep the voucher with board or shareholder records, relevant accounts and payment evidence. If a dividend is credited to a director’s loan account, document the credit and verify that the transaction is effective. Different payment dates can affect reporting, so do not backdate paperwork to move income into a preferred tax year.

Separate company and shareholder tax

Dividends are not deducted as a trading expense when calculating Corporation Tax. The company generally pays them from profits after considering its tax liabilities. Individual shareholders may owe dividend Income Tax according to their circumstances, allowances and the tax year of receipt. A corporate shareholder has a different tax framework.

Do not assume an amount is tax-free because it falls within a generic example. Other income, residence and share arrangements can change the result. Keep a personal tax reserve if needed and provide accurate records to the adviser preparing Self Assessment. Payroll salary and pension contributions require separate analysis; a dividend cannot simply replace employment reporting for a payment that is actually earnings.

Worth knowing: A lawful dividend and a tax-efficient remuneration plan are separate questions. Establish legality first, then assess the personal tax result.

Worked example: allocating a dividend between shareholders

Illustrative example: a company has adequate distributable reserves and two shareholders with the same dividend rights. One owns 60 ordinary shares and the other owns 40. If a lawful £5,000 dividend is declared across that class, the proportional amounts are £3,000 and £2,000. The working director cannot take all £5,000 merely because the other shareholder is not employed.

The board checks up-to-date accounts, tax reserves and cash commitments, follows the articles and records the decision. Each shareholder receives a voucher matching the actual payment. The example demonstrates allocation only; it is not a personal tax calculation or a recommendation to pay £5,000.

Create a dividend decision file, not just a payment label

A company considering an interim dividend should obtain reliable current financial information. Annual accounts prepared months ago may not reflect recent trading losses, tax liabilities or other adjustments. The directors ask the accountant which profits are available for distribution and document the calculation. Cash in the bank is a different test: borrowed funds or customer deposits can produce cash without distributable profits. Conversely, retained accounting profits may coexist with insufficient cash to pay suppliers and a dividend. The board considers both lawful reserves and practical cash needs.

The company checks the articles and share-class rights before deciding the amount. Where all shares in a class rank equally, payment should follow those rights; it is not a tool for giving one director more money because they worked more hours. Different class rights, waivers or complex ownership need advice and proper documentation. The approval route differs for interim and final dividends, and the company follows the actual constitution and applicable law. A sole owner-director records the decision even where no separate meeting with other people is needed.

The decision file identifies the date, company, recipients, amount and relevant financial basis. Vouchers should match the actual dividend and contain the information needed by shareholders and their advisers. Bank payments or a genuine credit to an account are reconciled with the vouchers. A future declaration cannot be backdated to reclassify an earlier unsupported withdrawal. If the company has several directors and shareholders, it separates remuneration for work from distributions on shares. The accountant can then understand the transactions without guessing from a bank description such as owner payment.

Each shareholder considers their personal tax position using the dividend amount and actual timing. A lawful company dividend is not a promise of tax-free income, and residence or other income can change the result. The company retains records through the required periods and reconciles dividends to director loan accounts at year end. If the company’s financial position deteriorates, further distributions are paused and the directors obtain advice. Where an earlier distribution may have been unlawful, they address the facts and possible repayment or liability consequences rather than manufacturing retrospective paperwork.

Address unsupported withdrawals honestly

If money has already been withdrawn without a lawful dividend decision, do not backdate accounts or invent minutes. Ask the accountant how the transaction should be recorded and whether it is a loan, salary or another item. An unlawful distribution can create repayment and director-duty issues, particularly where recipients knew or should have known the payment was improper.

If losses or cash pressure emerge after a dividend is planned, reconsider before paying. When insolvency is a concern, creditor interests require specialist attention and distributions may be inappropriate. Keep a regular reconciliation of dividends, payroll and director loan balances so errors are caught before year-end.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• GOV.UK: Taking money out of a limited company
• Companies Act 2006: Distributions
• GOV.UK: Tax on dividends

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.