Hi Hazel, your original understanding was right. The test is done on total accumulated distributable profits at the date you declare the dividend - it is not year by year.
The rule
Under the Companies Act, a dividend can only be paid out of distributable profits - broadly, accumulated realized profits less accumulated realized losses. Retained profits from previous years count fully. So if the company built up healthy reserves over the last few years and distributable profits at declaration date cover the dividend, you can pay it even in a quiet year. The confusion you read about usually comes from the fact that you cannot pay a dividend at all if the company's distributable profits are nil or negative at that point - the test is cumulative, measured when you declare.
Two caveats worth knowing: check the company's articles, as they can add their own restrictions; and the directors should be satisfied the company will still be able to pay its debts and meet its liabilities after the dividend is paid. An unlawful dividend can be recoverable from shareholders who knew, or should have known, it was unlawful.
Paperwork for each dividend
Keep it tidy every time, not just when HMRC asks. The standard drill is:
- Before declaring, check the position using up-to-date accounts or management accounts showing distributable profits.
- Record a board minute for the declaration: the amount per share, the total dividend, the date, and the shareholders it is paid to.
- Prepare a dividend voucher (or counterfoil) for each shareholder: company name, shareholder name, date of payment, number of shares held, dividend per share, and total amount.
- Keep the minute and vouchers with the company's statutory books and accounts records.
The personal tax side
Dividends are taxable income in the shareholder's hands. For 2026/27 there is a £500-a-year dividend allowance, and above that the dividend tax rates are 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. So when you take money out, it is worth considering the timing and the shareholders' other income for the year.
