Dividends in your accounts

1. Why “dividends paid” isn’t in the P&L

Dividends are a distribution of profits already earned and taxed, not a business expense. UK accounting standards explicitly keep them off the income statement:

• FRS 105 (micro-entities): the prescribed micro-entity income statement is the only profit-and-loss format permitted, and it has no line for dividends paid. Dividends instead reduce shareholders’ funds on the closing balance sheet.
• FRS 102 Section 1A (small companies): dividends declared during the period are presented in the Statement of Changes in Equity (or in the notes if the company has elected the abridged reduced-disclosure regime). They never run through profit & loss.
• Companies Act 2006: treats dividends as a transaction with shareholders, not a cost of doing business.

If we collected a “dividends paid” figure and let it flow into the P&L, the resulting accounts would breach the relevant FRS, and the corporation-tax computation would be wrong (because dividends aren’t deductible against trading profit anyway).

2. Where the money actually goes

Closing assets after payment

Financial data → Balance sheet → Current assets

Include the actual closing cash balance within this total. Do not enter the dividend as a separate expense.

Closing reserves after the distribution

Retained earnings

Enter the prepared closing balance after the dividend. The wizard does not infer this movement from a dividends-paid field.

Dividends the company received

Profit & loss → Dividends received

This is incoming dividend income, not distributions paid to shareholders. Use the dividends-received guide for its taxable subsets.

When the company declares and pays a £X dividend during the year:

• Cash at bank decreases by £X (money left the business).
• Retained earnings (reserves) decreases by £X.
• Profit before tax and corporation tax are unchanged.

So the only thing you need to do in the wizard is enter the closing balances that are correct after the dividend was paid. The arithmetic on the P&L stays exactly the same.

3. Old drafts with a dividends-paid value

Reopening an older draft does not create a dividends-paid input. Check the current closing Current assets and Retained earnings balances against your prepared accounts, then review the regenerated documents. The amounts paid must already be reflected in those balances.

4. The lawful-distribution check (CA 2006 s.830)

Before paying a dividend, the company must have distributable reserves at least equal to the dividend amount, measured against the most recent statutory accounts (or proper interim accounts). Distributable reserves are broadly:

Accumulated realised profits − accumulated realised losses

Assess the distribution at the relevant date using the relevant accounts under Companies Act 2006 sections 836 to 840, not just the eventual year-end balance sheet. A positive closing retained-earnings figure is not proof that an earlier dividend was lawful. Equally, a later trading loss does not retrospectively make a dividend unlawful if sufficient distributable profits supported it when made. Cash in the bank is not the same as distributable profit.

We accept the figures you enter and do not verify the company's distributable reserves. If you are unsure, check HMRC's dividend and company-law guidance or get advice. An unlawful distribution is not automatically reclassified as salary.

5. Dividends received

Dividends received by the company are different from dividends it pays to shareholders. Enter the amount in Dividends received and supply your classification in the related tax-treatment fields. We rely on your classification rather than treating the country of the payer as the answer.

For exemption conditions, taxable amounts and the separate treatment of distributions when calculating marginal relief, see dividends received and your Corporation Tax rate for the official guidance and worked examples.

6. References

• FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime (FRC, current edition).
• FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland, Section 1A Small Entities.
• Companies Act 2006, Part 23, Chapter 2 (ss.829– 853): rules on distributions, and s.830 in particular on the profits available for distribution.
• Corporation Tax Act 2009, Part 9A: exemption for distributions received.

This page is general guidance, not tax advice. Speak to a chartered accountant or tax adviser if your circumstances are unusual.