The company makes a loss can a dividend be paid

One of the most common questions we hear from directors at Severn Accounting is whether they can still pay a dividend when their company has made a loss. The short answer is yes—but there are strict rules you must follow, and getting it wrong can result in serious penalties from HMRC. Let’s walk through the legal requirements and practical considerations.

Can You Actually Pay a Dividend From a Loss-Making Company?

Under UK company law, dividends must be paid from “distributable reserves.” This is the key concept. A company can technically pay a dividend even if it’s made a loss in the current year, provided it has accumulated profits from previous years that remain in the company. These retained earnings are what constitute your distributable reserves.

The Companies Act 2006 sets out strict tests: a distribution (which includes dividends) is only lawful if, at the time the distribution is made, the net assets of the company are at least equal to the aggregate of the company’s called-up share capital and undistributable reserves. In simpler terms, your company must remain solvent after paying the dividend.

For most small companies, this means checking your balance sheet. If you’ve made losses this year but built up reserves in previous profitable years, those reserves can theoretically support a dividend payment. However, many directors don’t realise that this requires a careful assessment of your company’s financial position at the exact moment the dividend is paid.

The Solvency Statement Requirement

Before paying any dividend, you should prepare a solvency statement. This document confirms that the company will remain solvent immediately after the distribution. For private companies, the directors can simply make this statement based on their knowledge of the company’s affairs—you don’t need external verification unless you’re a public company.

This is where many small company directors slip up. They pay a dividend without formally considering whether the company remains solvent, and if HMRC later challenges this, you could face penalties. The statement doesn’t need to be elaborate, but it should be properly documented and retained with your company records.

It’s worth noting that if your company is insolvent or approaching insolvency, paying dividends can be treated as wrongful trading. Directors can face personal liability if they allow distributions when the company cannot pay its debts, so this is not something to take lightly.

Tax Implications for Directors and the Company

Here’s another important point: paying a dividend when you’ve made a loss doesn’t create a tax deduction for the company. The loss remains what it is—a loss that you may carry forward to offset future profits. However, the cash leaving the company as a dividend is still real cash.

For the director receiving the dividend, the tax treatment depends on the size. For the 2024–25 tax year, the dividend allowance is £500 for basic rate taxpayers. Any dividend received above this threshold is taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.

From a company perspective, dividends are paid from post-tax profits, so there’s no corporation tax relief. If you’re trying to extract money from a loss-making company, you might be better off considering alternative strategies like directors’ loans or salary, depending on your circumstances.

A Practical Warning

Many loss-making companies are tempted to pay dividends to support cash flow or because previous years were profitable. Whilst this is technically legal if distributable reserves exist, it’s risky territory. If the company then encounters further difficulties, HMRC may investigate whether the dividend was lawfully paid.

Additionally, if you’re applying for business finance, lenders will look unfavourably on companies that pay dividends whilst making losses. It signals poor financial management, even if it’s technically compliant.

Conclusion

Paying a dividend from a loss-making company is possible, but only if you have sufficient distributable reserves and your company remains solvent afterwards. Before proceeding, you must carefully assess your financial position, document a solvency statement, and consider whether paying a dividend is the right decision for your business’s future.

If you’re uncertain about your position or want to explore alternative ways to extract value from your company, professional advice is invaluable. Every situation is different, and what works for one company may not suit another.

For tailored advice, contact Severn Accounting — we’re here to help.