The Government has announced plans to consider major changes to the rules governing when companies can make distributions to shareholder.
As part of a wider corporate reporting overhaul announced on 6 September 2026, the Government is considering replacing the existing rules on distributable profits and capital maintenance with a solvency-based regime. A consultation opened on 7 September and runs until 30 November 2026.
This is only a proposal, so companies must continue to follow the current rules.
At present, a company cannot simply pay a dividend because it has enough cash in the bank.
Broadly, dividends must be paid out of profits available for distribution, usually established by reference to the company's relevant accounts. Directors therefore need to consider accumulated realised profits and losses before declaring or paying a dividend.
This can create confusion in owner-managed companies.
A business might have £100,000 in its bank account but still be unable to pay a lawful dividend if it does not have sufficient distributable reserves. Equally, a profitable company may have adequate reserves but insufficient cash to make a sensible payment.
The Government is now considering whether a solvency-based approach could replace the existing system.
Exactly how this would work remains to be seen, and businesses should not assume that the current rules are about to disappear.
For directors, the practical message is straightforward.
Before paying a dividend, confirm that sufficient distributable reserves exist, ensure the appropriate accounts support the payment and complete the necessary company paperwork.
Directors should also consider whether the company can afford the distribution after allowing for Corporation Tax, VAT, PAYE, loan repayments and other commitments.
The rules may eventually become simpler, but until the law changes, a healthy bank balance is no substitute for checking that a dividend is legally available.
