Limited company guide
What makes a dividend unlawful, the consequences for directors and shareholders, how HMRC treats the payment, and how to correct an overdrawn position.
Short answer
A dividend paid when the company has insufficient distributable reserves is unlawful. The shareholder can be required to repay it if they knew or ought to have known, directors can be personally liable for the shortfall, and HMRC will usually treat the payment as a director's loan, triggering section 455 tax at 35.75% and a benefit-in-kind charge on any interest-free balance above £10,000.
Written and reviewed by Waqas Sagar Member of ICAEW, Fellow of ACCA, Fellow of AAT, a double graduate and entrepreneur at heart, helping startups grow and serving thousands of businesses nationwide with an excellent team. Published by LimitedCompany.Accountants, 12 London Road, Morden, London SM4 5BQ. Reviewed 12 September 2026 against 2026/27 UK rates and current Companies House and HMRC guidance.
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QuickBooks PartnerCertified ProAdvisor100+ yearsCombined team experienceFully insuredUp to £2m indemnityA dividend paid when the company has insufficient distributable reserves is unlawful. The shareholder can be required to repay it if they knew or ought to have known, directors can be personally liable for the shortfall, and HMRC will usually treat the payment as a director's loan, triggering section 455 tax at 35.75% and a benefit-in-kind charge on any interest-free balance above £10,000.
How companies end up here
The legal consequences
How HMRC treats it
Fixing it
Before you act
The usual route is drawing a regular monthly amount based on cash rather than profit, then discovering at the year end that the company made less than expected, or that corporation tax and VAT liabilities absorbed the reserves.
A loss-making year also removes previously accumulated reserves. Last year's surplus is not automatically available this year.
Under the Companies Act a shareholder who knew, or had reasonable grounds to believe, that the distribution was unlawful must repay it. A director-shareholder of an owner-managed company will find that hard to dispute.
Directors who authorise an unlawful distribution can be personally liable to restore the amount to the company, and in an insolvency a liquidator will pursue exactly this.
The payment is usually reclassified as a loan to a participator. If it is still outstanding nine months and one day after the year end, the company pays section 455 tax at 35.75% of the balance, refundable only after the loan is repaid, and then only nine months after the end of the year in which repayment happens.
An interest-free balance over £10,000 at any point in the tax year is also a benefit in kind, reportable on a P11D with Class 1A National Insurance for the company.
Options are to repay the balance in cash, to declare a lawful dividend once reserves exist and clear the loan against it, or to vote a bonus through payroll, which carries income tax and National Insurance but is deductible for corporation tax.
Beware 'bed and breakfasting': repaying just before the nine-month date and redrawing shortly afterwards is caught by anti-avoidance rules where £5,000 or more is involved.
Correct the accounting entries and the minutes rather than leaving the accounts showing a dividend that was never lawful.
Rates, thresholds and deadlines quoted here reflect the 2026/27 UK tax year. Check current GOV.UK guidance, or ask us, before relying on them for your own company.
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We work with company directors across London and Surrey from our office at 12 London Road, Morden, London SM4 5BQ. Pick your area, or send the form below and we will call you back.
Frequently asked
Not in itself. It is a breach of the Companies Act with civil consequences: repayment by the shareholder and potential personal liability for the directors.
You can vote a bonus, but it must go through payroll with PAYE and National Insurance, and it must be done properly and promptly rather than backdated.
Overdrawn loan accounts are disclosed on the CT600 supplementary pages and in the accounts, so the position is visible on the return itself.
Yes, once the loan is repaid, released or written off, but the refund is not due until nine months after the end of the accounting period in which that happens.
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Included approach
Check the current rules
Deadlines, thresholds and filing rules change. GOV.UK and Companies House publish the current statutory position; advice should then be applied to your company’s circumstances.
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