Should I take dividends in a loss-making year, or leave the money in the company?

Hi Oliver,

Good questions — this is exactly the kind of year where the dividend rules bite, so let's take them in order.

Can you pay dividends in a loss-making year? Yes — a dividend is legal in a loss-making year if the company has sufficient retained distributable profits (i.e. accumulated profits from current and previous years) to cover it. The test is what the accounts show as distributable, not this year's result. Always declare dividends at a directors' meeting, keep minutes even if you're the sole director, and issue a dividend voucher each time.

What if there are no retained profits? You're right — then you can't take a dividend at all, however much cash is sitting in the account. An unlawful dividend can be reclaimed by the company, so directors have to repay it. If the numbers are borderline, get the accounts checked before declaring anything.

Tax: take or leave? There's no tax advantage to "wasting" a loss — taking a dividend doesn't eat into it, because dividends aren't a business cost and don't affect the trading loss. The question is simply what cash you need. Taking the dividend now is taxed at dividend rates this year; leaving it in the company means it stays as retained profit (after the loss) to draw later. If you're a higher-rate taxpayer this year but might drop a band later, timing can matter — but don't contort yourself just to avoid paying a dividend.

What to do with the loss: trade the loss smartly. A trading loss can be carried forward against future profits of the same trade, or carried back against profits of the previous 12 months (claimed on the Company Tax Return). If last year was profitable, carrying back may get you tax repaid sooner. Either way, claim it — don't let it slip away.

Keep your salary ticking over as normal; that one's unaffected by all of this.

Amelia