What is An Illegal Dividend A business owner must beware of draining the cash reserves of a company. If the company cannot meet its obligations it is technically insolvent.   There is a risk that a business owner (being a shareholder) takes too much out of the company during the year. This is likely to happen where they employ the services of an accountant purely for compliance (i.e vat returns, accounts and tax) but do not consult the accountant during the year to see what is available to be taken as dividend.   In saving on accounting fees by not performing the above, the business owner is at risk of taking more dividend than they are entitled to thus creating an "illegal dividend".   The word "illegal" is used not so much in the legal sens i.e fines, court etc but in the sense the owner took more than they were entitled to.   Outcomes Of Illegal Dividends If an illegal dividend occurs an not immediate strategy is possible to either settle the outstanding amount or treat it in any other way, then penalty tax will be due on it at 30%. This can be avoided or refunded if the outstanding amount is repaid back to the company within 9 months of year end.   If ever there was a case for having interim accounts and advice "in year" then this is it. Ignore at your peril!