What is an unlawful dividend?

A dividend paid when the company does not have enough profits available for distribution: accumulated realised profits, less realised losses, after tax. The part not covered by those profits is unlawful.

Do I have to pay back an unlawful dividend?

Yes, if you knew or had reasonable grounds to believe the facts that made it unlawful, which a director-shareholder nearly always does. Not knowing the law is not a defence.

How does HMRC tax an unlawful dividend?

Where company law requires it to be repaid, HMRC treats it as a loan to the shareholder. It goes into the director's loan account and, if not repaid within 9 months and 1 day of the year end, the company pays s455 tax at 35.75% on loans made from 6 April 2026.

Can I pay a dividend based on my bank balance?

No. The test is retained profits after corporation tax, not cash. A healthy bank balance can include VAT and corporation tax that are owed to HMRC.

What happens to an unlawful dividend if the company goes insolvent?

A liquidator can claim it back from the shareholder and can pursue directors who authorised it. Keeping management accounts and minutes for every dividend is the best protection.

Guide

Paid a Dividend Without Enough Profit? Unlawful Dividends Explained

Written by James Whitfield · Last checked 18 October 2026 · Checked against 2026/27 HMRC rates

It usually happens quietly: monthly "dividends" based on the bank balance, then the year-end accounts show the company did not have the retained profit to cover them. Here is what that means in law and for tax in 2026/27, and how to put it right.

Quick answer

A dividend paid without enough distributable profit is unlawful, and a shareholder who knew, or had reasonable grounds to believe, the facts that made it unlawful must repay it¹². For a director-shareholder that is almost always the case. HMRC then treats the money as a loan to the shareholder³, so it sits in the director's loan account: if it is not repaid within 9 months and 1 day of the year end, the company pays s455 tax at 35.75% on loans made from 6 April 2026⁴.

Key facts

Dividends can only come from accumulated realised profits less realised losses, after tax¹.
A shareholder who knew or should have known the circumstances must repay the unlawful part². Not knowing the law is no defence.
HMRC treats a repayable dividend as a loan to the shareholder, within the loans to participators rules³.
s455: 35.75% on loans from 6 April 2026 (33.75% before), refundable once repaid⁴.
Over £10,000 owed at any time in the tax year can also create a benefit in kind at the 3.75% official rate.

Investing rather than running a company? Get all 7 tax packs, CGT included — £9.99

When is a dividend unlawful?

Under the Companies Act 2006 a company may only make a distribution out of profits available for the purpose¹. In practice that means the retained earnings on the balance sheet, after corporation tax on the profits, are at least as large as the dividends. It is not about cash in the bank.

Common triggers: dividends paid on the strength of the bank balance while corporation tax for the year was not set aside; a bad debt or stock write-down at the year end that wipes out the profit; and dividends paid with no management accounts at all. A dividend can also be invalid if the paperwork is missing (no minute, no voucher), which leaves HMRC free to argue the payment was salary or a loan.

What are the consequences?

Company law: the shareholder must repay the unlawful amount if they knew or had reasonable grounds to believe it broke the rules². The courts have held that knowing the facts is enough (It's a Wrap (UK) Ltd v Gula, Court of Appeal, 2006).
Directors: directors who authorised it can be personally liable to the company, which matters most if it later becomes insolvent and a liquidator reviews past payments.
Tax: HMRC's Company Taxation Manual treats a dividend that must be repaid as a loan to the shareholder³, so it falls into the director's loan account and the s455 rules.

Worked example: £20,000 paid, £8,000 available

Tom paid himself £20,000 of dividends during the company's year to 31 March 2027. The final accounts show only £8,000 of retained profit after corporation tax. £12,000 is unlawful and goes to his director's loan account.

Dividends paid	£20,000.00
Profits available for distribution	£8,000.00
Unlawful part, now owed by Tom	£12,000.00
s455 if unpaid by 1 January 2028 (35.75%)	£4,290.00
Benefit in kind if interest-free (12,000 × 3.75%, full year)	£450.00
Lawful dividend taxed on Tom	£8,000.00

s455 is due 9 months and 1 day after the year end, and refunded once Tom repays the £12,000. The benefit-in-kind figure is approximate and depends on when the balance went over £10,000. Tom reports £8,000 of dividend income, not £20,000.

How do you fix an unlawful dividend?

Quantify it from the year-end accounts: dividends paid less profits available.
Record the excess as owed by the shareholder in the director's loan account, and minute the decision.
Repay it from personal funds, or clear it later with a lawful dividend once new profits are made, or through salary via payroll.
Mind the s455 date: clearing the balance within 9 months and 1 day of the year end avoids s455 altogether⁴.
Correct your tax return if you already reported the full amount as dividends.
Fix the process: management accounts with corporation tax set aside before every dividend, a board minute and a voucher each time.

The step-by-step guide to declaring a dividend sets out the process that stops it happening again.