Retained profits are profits kept within a company rather than distributed to shareholders. They appear within equity in the accounts, but they are not the same as the bank balance. A company can have accumulated profits tied up in customer debts, stock or equipment.
In this article
- Review up-to-date accounts
- Check distributable profits
- Consider cash commitments
- Document any lawful dividend
Dividends are distributions to shareholders. Before paying one, directors need to establish the amount legally available, consider the company’s position and complete the appropriate decision and paperwork. Choosing a transfer amount because cash happens to be available is not enough.
Follow how retained profits change
Retained profits generally move with the company’s after-tax results and recorded distributions, alongside any relevant adjustments. A loss reduces the accumulated amount; it cannot be ignored simply because the company made profits in earlier years.
Illustrative example: a company begins with £35,000 retained profits. It then records an £8,000 after-tax loss and £12,000 of properly accounted-for dividends. Assuming no other adjustments, closing retained profits are £15,000: £35,000 minus £8,000 minus £12,000.
That calculation explains the accounting movement. It does not certify that a £15,000 dividend is legally available at a later date. The directors need current, appropriate accounts and consideration of the relevant distribution rules.
Establish profits available for distribution
Section 830 of the Companies Act 2006 limits distributions to profits available for the purpose, based on accumulated realised profits less accumulated realised losses. Not every reserve appearing within equity is distributable.
GOV.UK’s dividend guidance also explains that dividends cannot exceed available current and previous-year profits and are not business costs for Corporation Tax. A dividend therefore does not reduce taxable trading profit simply because it reduces company cash.
Ask the accountant which accounts support the proposed distribution, whether losses or adjustments affect availability and whether any reserves require separate treatment. Include a sensible assessment of tax provisions; pre-tax bookkeeping profit is not the amount automatically available to shareholders.
Check profit and cash separately
Illustrative cash example: a company has £8,000 in its bank, with £5,000 tax and £4,000 supplier payments approaching before expected customer receipts. Its immediate commitments exceed current cash by £1,000 even before any dividend.
The company may show positive retained profits, but distributing cash now could intensify the shortfall. A short-term cash forecast should therefore sit alongside the profits review. Test what happens if a major customer pays late or the next month’s sales are weaker.
| Question | Evidence to use |
|---|---|
| Are profits available? | Appropriate accounts and distribution assessment |
| Can the cash payment be supported? | Bank balances and realistic cash forecast |
| Who is entitled to the dividend? | Share rights and ownership records |
| Has the decision been documented? | Relevant approvals, minutes and vouchers |
| Is the bookkeeping complete? | Ledger entries linked to the decision and payment |
Company articles, share classes and wider circumstances can matter. Avoid assuming that every shareholder must receive an identical amount or that a director can choose recipients without reviewing their rights.
Complete the paperwork at the right time
GOV.UK describes a directors’ decision and minutes, including where there is only one director. It also requires a dividend voucher identifying the date, company, recipient and amount, with copies retained and provided to recipients.
Check whether the payment is an interim or final dividend. HMRC’s company-law explanation distinguishes their approval and entitlement timing, which also depends on the articles. Do not assume that an unpaid interim dividend creates the same liability as a properly declared final dividend.
Prepare the documentation as part of the genuine decision process. Do not create a backdated voucher to make an unexplained withdrawal appear authorised. If money has already been taken without established treatment, discuss the facts and director’s loan position with the accountant.
Keep the accounts supporting the decision, meeting record, vouchers and payment evidence together. Record unpaid authorised distributions correctly rather than assuming that declaration and bank payment always happen on the same date.
Consider the shareholder’s tax position
Personal tax on dividends is a separate issue from whether the company can lawfully pay them. The shareholder’s other income and circumstances matter. Do not rely on a generic online example to set an amount or assume a dividend has no reporting consequences.
Salary, reimbursement, loan repayment and dividend are different transactions. A valid loan repayment does not become a dividend merely because it goes to an owner, while an unsupported dividend label does not resolve an overdrawn loan account.
For a review grounded in current records, discuss EPOS financial accounts services and tax support. Bring the latest accounts, share details, prior distribution records and cash forecast so the discussion can address both availability and affordability.