Directors, salary & dividends
A dividend paid without sufficient distributable reserves is unlawful. The consequences, how HMRC treats it, and how to fix it before the year end.
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.
Regulated by
Regulated & AML supervisor
AAT fellow member
Xero Gold PartnerCertified advisor
QuickBooks PartnerCertified ProAdvisor100+ yearsCombined team experienceFully insuredUp to £2m indemnityAn illegal or unlawful dividend is one paid when the company has insufficient distributable reserves. It is void under the Companies Act, usually repayable by the shareholder, and HMRC commonly recharacterises it as a director's loan or as salary.
How companies end up there
Consequences and the fix
An illegal or unlawful dividend is one paid when the company has insufficient distributable reserves. It is void under the Companies Act, usually repayable by the shareholder, and HMRC commonly recharacterises it as a director's loan or as salary.
Reserves are retained profit after corporation tax, not the bank balance. Drawing against cash that is really VAT, PAYE and corporation tax money is the usual route to an unlawful distribution, particularly in a first profitable year followed by a loss.
Reserves must be tested at the date of each dividend by reference to relevant accounts, not at the year end with hindsight. A dividend legal in March can be unlawful if the year turns out badly, which is why interim accounts matter.
A shareholder who knew, or should have known, the company lacked reserves must repay it, and directors can be personally liable for the shortfall. In insolvency, liquidators pursue exactly this.
For tax, the amount typically becomes an overdrawn director's loan, with a 35.75% s455 charge if not repaid within nine months and one day of the year end, a benefit in kind on the interest-free balance, or PAYE and NIC if treated as remuneration. Correcting it early, by repaying, declaring a legal dividend once reserves exist, or voting a bonus, is far cheaper than leaving it.
Rates, thresholds and deadlines quoted here reflect the 2026/27 UK position and current Companies House and HMRC guidance. Check GOV.UK, or ask us, before relying on them for your own company.
Local help
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
That is often the right treatment, but the loan brings s455 tax and benefit in kind rules with it, so it needs managing.
Yes. Reserves against dividends is a standard check in a company enquiry, and the accounts show it plainly.
Cash and reserves are different things. Solvency does not create distributable profit.
Keep bank statements, sales and platform reports, purchase invoices, payroll records, VAT workings, finance agreements and Companies House correspondence. We confirm the exact list at onboarding and identify gaps before a filing deadline becomes urgent.
The fee depends on transaction volume, record quality, VAT and payroll requirements, historic catch-up and the level of reporting needed. We agree a fixed scope and price before technical work starts, with published packages available on our fees page.
Yes. We request professional clearance, collect the prior records and authorities, check the next Companies House and HMRC deadlines, and give you one clear handover list. The process is normally completed remotely.
Yes. We work through secure cloud records, scheduled reviews and digital approvals, while keeping a named team available by phone, video call and email. Clients can also visit our Morden office by appointment.
We regularly work with Xero, QuickBooks, FreeAgent, Sage and connected sales or expense apps. The right setup depends on transaction volume, integrations and the reports you need, not simply the software brand.
The relevant calendar may include annual accounts, Corporation Tax payment and return dates, confirmation statements, VAT returns, payroll submissions and Self Assessment. We map the dates from your company year end and registrations.
No. This page explains general UK rules and common accounting treatment. Your facts, contracts and wider tax position must be reviewed before you rely on a conclusion.
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.
Talk to an accountant
Share your next deadline, accounting problem or growth question. We will reply with a clear next step and quote any technical work before it begins.
Chat with ACCOTAX on WhatsAppPick a time that suits you and a qualified accountant will call you about your company, deadlines and fees.
Appointments run Monday to Friday, 9:00am to 5:30pm. Your confirmation is emailed straight away.
Four London offices
Work with us entirely online, or sit down with your accountant at whichever office suits you. Open Monday to Friday, 9:00am to 5:30pm. Office visits are by appointment only, so please book before coming in.
Free, no obligation
Pick a time that suits you and a qualified accountant will call you about your company, deadlines and fees.
Appointments run monday to friday, 9:00am to 5:30pm. Your confirmation is emailed straight away.
