Thames Water intentionally diverted millions of pounds pledged for environmental clean-ups towards other costs including bonuses and dividends, the Guardian can reveal.

The company, which serves more than 16 million customers, cut the funds after senior managers assessed the potential risks of such a move.

Discussions – held in secret – considered the risk of a public and regulatory backlash if it emerged that cash set aside for work such as cutting river pollution had been spent elsewhere.

This could be seen as a breach of the company’s licence commitments and leave it vulnerable to accusations it had broken the law, according to sources and material seen by the Guardian.

Thames Water continued to pay staff bonuses worth hundreds of thousands of pounds, and also paid tens of millions in dividends as recently as March this year, while cutting back on its spending promises. The company did so despite public claims from its leaders that improvements to its environmental performance, including on pollution, were a priority.

Sources told the Guardian that internal deliberations about cutting back on the environmental works occurred as early as the end of 2021 and throughout 2022, when bosses weighed up the political and reputational risks of such a move.

Meanwhile, Thames continued to charge customers for the works and Ofwat was only formally told of some of the company’s plans not to deliver these major projects in August 2023. A letter, seen by the Guardian, was sent to the head of the regulator Ofwat, David Black, by the company’s then interim co-chief executive and former boss of the watchdog, Cathryn Ross.

In its response to the Guardian and the 2023 letter to Ofwat, Thames said sharp increases in its costs such as energy and chemicals – which it claims went beyond standard measures of inflation – lay behind its decisions to delay the works.

It told the regulator that it would not deliver 98 of 826 schemes under the water industry national environment programme (Winep) during the five-year window it had promised. The delivery of these projects, which include schemes to reduce phosphorus pollution in rivers, was a key justification for how much Thames was allowed to charge customers.

The revelation comes as Britain’s biggest water company fights for its survival. It is trying to secure £3bn in emergency funding and at least £3.25bn more in equity investment to prevent its collapse, after years of poor performance, fines and hefty dividend payouts.

Winep projects include statutory obligations for water companies with potential criminal liability if they breach their licence by failing to deliver them.

Thames decided behind the scenes to hold up almost 100 projects as early as 2022 without first warning its regulators. Sources said of some of the projects Thames delayed were among the largest it agreed to do when it asked Ofwat for higher bills as part of its 2019 price review.

The cuts to environmental works did not stop the company from paying dividends or bonuses to staff. It continued to pay both throughout the 2020-25 billing period, for which it claimed it lacked the funds to complete works.

Ofwat fined the company £18.2m on 19 December for breaching rules on paying “unjustified” dividends, after the company paid out £37.5m in October 2023 and £158.3m in March 2024. On the same day it also gave Thames permission to increase consumer bills by 35% by 2030.

Thames’s regulated water services are part of a sprawling network of holding companies. Dividends were paid out of its operating company up towards its shareholders.

Ofwat’s dividend rules, which were toughened in April 2023, are meant to stop companies taking money out businesses where their performance does not merit it, and where the payouts do not take financial resilience into account, or “service delivery for customers and the environment”.

A spokesperson for Thames Water did not deny that it had delayed environmental works that it had promised and been paid to carry out. The spokesperson also did not deny that some of the funds had been used for other business costs including bonuses and dividend payments.

When first asked for a response by the Guardian, Thames said that allegations that it had diverted funds were “entirely false and without merit”.

In a later statement, Thames said only that the allegation that it did so “secretly” was false.

In public statements from its six chief executives over the past five years, Thames has consistently maintained its position that environmental improvements are a high priority for the company.

“Maintaining and improving the health of the rivers in our area matters to me, and I have made reducing pollution a key part of the turnaround plan for the company,” Chris Weston, the current chief executive at Thames Water, said in a river health report published by the company this year. His comments echo those of predecessors in the top job at the water company.

The document states that “addressing the level of nutrients (particularly phosphorus) in our rivers remains a key focus”, despite the company secretly trying to cut the money pledged to address such concerns.

Phosphorus in rivers and waterways can cause algal blooms that suffocate wildlife.

“It is right that we are held to account for complying with our legal obligations,” Weston said on a call with journalists on 10 December, as he noted a sharp increase in pollution caused by the business.

“We’ve also maintained high levels of capital investment for the benefit of our customers and the environment,” its former joint chief executive and chief financial officer Alastair Cochran said on the same call.

The government’s Winep effort was created to address water companies’ “role in protecting and enhancing the environment” after a series of sewage and pollution scandals. It was intended to “challenge” water suppliers to provide resilient, safe and environment enhancing services to consumers.

Thames could face criminal prosecution and unlimited fines if it was found to have breached its permits by Ofwat or the Environment Agency (EA).

The EA has fined water companies more than £130m since 2015 and fined Southern Water £90m in 2021, after what was then its largest ever criminal investigation.

In response to detailed questions from the Guardian, a Thames spokesperson said: “The allegation of ‘secretly diverted money’ is entirely false and without merit.

“The board and leadership team of Thames Water remain focused on turning round the business, and have submitted to Ofwat a robust business plan for the next five years that proposes record investment in our assets.

“We’ve been very open about the challenges of delivering all the elements of our Winep 7 programme, which has been impacted by cost increases that are higher than the inflation index applied to our allowances. In this Winep 7 period, we are forecast to spend £601m against an allowance of £369m. This is well documented in our business plan for 2025-30 and on our website.

“We remain fully committed to delivering all our Winep commitments, and indeed all the outstanding projects are currently under way and in the process of being delivered.

“Shareholders have not received an external dividend since 2017, and our business plan assumes dividends will not be paid before 2030.”