Before recommending a dividend, the finance director needs to explain both the profits available for distribution and the cash the company will retain afterwards. Those figures can be quite different. Borrowing or customer deposits may increase the bank balance without creating distributable profits.
The board should be able to follow the recommendation back to the company’s accounts, understand the effect on liquidity and see that the proposed payment follows the articles and share rights. A dividend voucher alone cannot provide that support.
Which company has the distributable profits?
The starting point is accumulated realised profits less accumulated realised losses, after allowing for amounts already distributed or capitalised. This is the basis set by section 830 of the Companies Act 2006.
The relevant figure is not simply this year’s profit, total reserves or cash. Check the composition of reserves and the treatment of material adjustments. Some gains included in accounting profit may not be available for distribution.
In a group, assess the company making the payment. Profits shown in consolidated accounts do not automatically create distributable profits in the parent. Cash held by a subsidiary is not automatically available for the parent to distribute either.
£140,000 in the bank, but £10,000 of available profits
A private company has £140,000 in the bank. Its last annual accounts supported £40,000 of distributable profits. Since then, it has incurred £25,000 of realised losses and made £5,000 of distributions not included in that starting figure.
On these simplified assumptions, the remaining amount is £10,000: £40,000 less £25,000 less £5,000. The £140,000 cash balance does not support a £60,000 dividend.
The illustration assumes no other adjustments or restrictions. The company still needs appropriate supporting accounts and a separate assessment of liquidity, duties and approvals.
Use accounts that support the decision
The calculation needs to be supported by relevant accounts under section 836 of the Companies Act 2006. Usually these are the last annual accounts; the circumstances specified by the Act may require interim or initial accounts.
Recent management accounts are useful only if they provide the necessary basis for the decision. Where used as interim accounts, they must allow a reasonable judgement of the relevant amounts, including material accruals, tax, losses and other necessary adjustments.
An audit qualification also needs attention where the relevant accounts require audit. A further auditor’s statement may be required under section 837(4) to address whether the qualification matters to the proposed distribution.
Review developments since the accounts date. A deterioration in trading or a significant impairment can change the conclusion. Reconcile earlier distributions carefully so that the same profits are not used twice.
Assess what remains after payment
Prepare a cash forecast that includes the proposed dividend and the company’s obligations. Review payment timing, available facilities, covenants and foreseeable downside risks.
Having distributable profits does not make every payment prudent or permissible in the circumstances. Directors’ duties and creditor interests require particular care where the company is in financial difficulty. Obtain appropriate advice before proceeding if solvency or the effect on creditors is in doubt.
The board paper should show what cash will remain after the dividend and the commitments falling due next. Directors can then assess the payment with the tax bill, debt instalments and trading needs in view.
Follow the articles and share rights
Before approving the payment, confirm which shareholders are entitled to it under the rights attached to each share class.
The company’s articles determine the approvals needed. Interim and final dividends can have different decision and legal consequences, so the documentation should reflect the actual transaction.
Keep the accounts, calculation, cash assessment and approvals together so the reason for the payment can be understood later. The record should identify the amount, date and shareholders entitled to receive it.
If a payment may already be unlawful
Review the facts promptly. Under section 847, a recipient who knew, or had reasonable grounds to believe, that a distribution contravened the statutory rules can be required to repay it. Directors may also face separate consequences.
Do not assume that relabelling the payment afterwards, or preparing a later dividend voucher, cures the original problem. Establish the correct legal and accounting treatment before deciding what corrective action is available.
Reviewed 21 October 2026. General guidance for ordinary UK private companies, not personal tax advice. Particular transactions, public companies and specialist regimes can require additional analysis.
Sources and further guidance
Companies Act 2006: section 830
Companies Act 2006: sections 836 to 840, relevant accounts
Companies Act 2006: section 847
HMRC CTM15205: dividends and company law
ICAEW: Paying dividends, the essentials
Related reading
Accendo: Prepare borrowing covenant evidence for the board and audit