Distributable reserves
Distributable reserves are the accumulated realised profits a company has left after tax and previous dividends. A dividend can only lawfully be paid from them, and paying beyond them creates an unlawful dividend.
Also known as: distributable profits, retained earnings
How it works
The figure is not the bank balance and it is not this year's profit. It is cumulative: all realised profits since incorporation, less all losses and all dividends already paid. A company can be sitting on cash from a VAT quarter or a customer prepayment and still have no reserves to distribute.
Directors must be able to justify the reserves position at the date of each dividend by reference to the last annual accounts or, where those do not support it, properly prepared interim accounts. That is why the board minute and the dividend voucher matter: they evidence the decision and the date.
Where a dividend exceeds reserves it is unlawful. The usual consequence is that the shareholder must repay it, or it is reclassified as a director's loan, bringing the 35.75% section 455 charge into play if it is still outstanding nine months and one day after the year end. If the company later becomes insolvent, a liquidator will look closely at dividends paid in the run-up.
Corporation tax reduces reserves, so a working rule is to set aside the tax and any VAT before deciding what is available. Cash left after those two is a much closer guide to what can safely be drawn.
Who this affects
- Directors drawing regular monthly dividends against expected profit
- Companies with a loss-making year that wipes out earlier reserves
- Growing companies holding cash that belongs to HMRC rather than shareholders
- Any company facing insolvency where past dividends may be reviewed
Common mistakes
- Using the bank balance as a proxy for available reserves
- Paying dividends before setting aside corporation tax and VAT
- Producing no board minute or voucher to date the decision
- Ignoring brought-forward losses that reduce cumulative reserves
Frequently asked questions
What are distributable reserves?
Accumulated realised profits less accumulated losses and dividends already paid. They are the only source from which a dividend may lawfully be paid.
How do I check I have enough?
Look at the last set of accounts and adjust for trading since, using interim accounts if needed, and deduct corporation tax on profit to date.
What happens if I pay an unlawful dividend?
It is typically repaid or reclassified as a director's loan, which can attract the 35.75% section 455 charge and a benefit in kind on balances over £10,000.
Can I pay a dividend if the company has cash but no profit?
No. Cash is not the test. Without distributable reserves the payment is not a lawful dividend.
Related terms
Work this out
Related reading
Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
Official sources
Not sure how this applies to your company? Get a fixed-fee quote.