How much dividend can I take?

There is sometimes a general presumption that dividends may be paid out of any cash that happens to be in the bank account at the time. But it’s not as simple as that and many business owners can fall into that trap. We can advise company directors on the paying of dividends and how much dividend can be taken.

The basic principles are to be found in the Companies Act 2006. In general, a private company can distribute the whole of its accumulated realised profits, less its accumulated realised losses to shareholders, via a dividend. In practice, unrealised losses have to be considered as well. Apart from statutory matters, you should take into account any provision of a company’s Memorandum or Articles restricting dividends.

It is a fundamental rule of law that dividends may not be paid out of capital. So, for example, a dividend based on accounts that show available profits would be ultra vires or invalid if made after subsequent losses have eliminated those profits.

Directors who make an unlawful or imprudent dividend may be held personally liable to account for it to the company.

The Companies Act makes shareholders liable to repay a distribution if, at the time of the distribution, they knew, or had reasonable grounds for believing, it to be illegal.

The message here is that before declaring a dividend, the directors must be as certain as they can be that there are sufficient distributable reserves available, taking into account any corporation tax on profits earned, and losses incurred, since the last annual accounts were prepared.

GEOFF SELBY, BUSINESS DIRECTOR

This may necessitate the production of reliable management accounts prepared using the same accounting policies as the annual accounts in order to give a true and fair view of profits, losses, assets and liabilities, share capital and reserves.

We can help in this area and should be pleased to discuss it with you.

If you are a company director and would like advice on paying dividends, get in touch. We're based in West Bridgford and help clients right across the UK.