What is Dividend?
A dividend is a payment a company makes to its shareholders from its profits. For director-shareholders, it's a tax-efficient way to extract money from your company.
Current Rate (2025/26)
Dividend tax: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate). £500 tax-free allowance.
Example
You take a £20,000 dividend. First £500 is tax-free. Remaining £19,500 taxed at 8.75% = £1,706 tax (if basic rate).
Key Dates
Declare in board meeting, pay when company has sufficient retained profits
How Dividend Works in Practice
A dividend is a distribution of post-tax profits from a company to its shareholders. For the typical owner-director of a UK limited company, dividends are the primary method of extracting profits after paying yourself a tax-efficient salary. Unlike salary, dividends are not subject to National Insurance, which makes them significantly cheaper than paying everything as salary.
Dividend tax rates for 2025/26 are 8.75% within the basic rate band, 33.75% within the higher rate band, and 39.35% within the additional rate band. There is a £500 tax-free dividend allowance, reduced from £1,000 in 2023/24 and £2,000 in 2022/23. Dividends use up your remaining Income Tax bands after salary and other income.
A critical legal requirement is that dividends can only be paid from available distributable profits. This means your company must have sufficient retained profits (accumulated profits after tax, less any previously paid dividends) to cover the dividend. Paying a dividend when the company does not have adequate profits is an illegal dividend, and you may be personally required to repay it. This catches directors who look at their bank balance rather than their retained profits figure.
Dividends must be properly documented. For each dividend, you need a board minute (or written resolution) declaring the dividend, and a dividend voucher for each shareholder receiving a payment. These documents are essential for your tax return and could be requested during an HMRC enquiry.
Step by Step
The typical process starts with checking your company has sufficient retained profits by reviewing your management accounts or asking your accountant. You then hold a board meeting (even if you are the sole director, you should minute the decision) to declare the dividend, specifying the amount per share and the payment date.
You issue a dividend voucher to each shareholder showing: the company name, date of payment, name of shareholder, and the amount. You pay the dividend from the company bank account to the shareholder. The shareholder then reports the dividend on their Self Assessment tax return and pays any dividend tax due.
Many directors pay themselves an interim dividend each month as part of their income strategy. This is perfectly acceptable, but each payment should be documented with a voucher. Some directors batch their vouchers quarterly. The key is that the paperwork exists and the company has sufficient profits at the time of each declaration.
Practical Tips
- Review your management accounts before each dividend to confirm the company has sufficient retained profits, not just a healthy bank balance
- Use a dividend voucher template and create one for every payment, even monthly payments, to maintain a clean paper trail
- Plan your total dividend for the year in advance to avoid accidentally pushing yourself into the higher rate tax band
- Consider timing larger dividends to straddle two tax years if you are approaching a tax band boundary, to use both years' allowances
Common Mistakes to Avoid
- Paying dividends when the company does not have sufficient retained profits, creating an illegal dividend that may need to be repaid
- Not keeping dividend vouchers and board minutes, which can cause problems during an HMRC enquiry or company audit
- Taking large dividends that push you into the higher rate tax band without planning, resulting in 33.75% dividend tax instead of 8.75%
- Forgetting to include dividends on your Self Assessment tax return, which HMRC can identify through cross-referencing company accounts
Frequently Asked Questions
How much dividend can I take from my company?
You can take up to the amount of your company's available distributable profits. These are accumulated profits after Corporation Tax, minus any dividends already paid. Your bank balance may differ from your distributable profits, so always check your accounts before declaring a dividend.
Do I pay National Insurance on dividends?
No. Dividends are not subject to National Insurance at all, for either the recipient or the company. This is the main tax advantage of dividends over salary. However, dividends are subject to dividend tax at rates of 8.75%, 33.75%, or 39.35% depending on your tax band.
What is the most tax-efficient way to pay myself as a director?
The standard approach is a low salary (typically £12,570 to use your personal allowance, or lower to minimise NI) combined with dividends. This takes advantage of the fact that dividends are not subject to NI and are taxed at lower rates than salary. The optimal split depends on your total income and personal circumstances.
Do I need to declare dividends on my tax return?
Yes. All dividends must be reported on your Self Assessment tax return, even those covered by the £500 dividend allowance. HMRC can cross-reference your company's accounts with your personal return, so undeclared dividends will be flagged.
What paperwork do I need for dividends?
You need a board minute or written resolution declaring the dividend, and a dividend voucher for each shareholder for each payment. The voucher should show the company name, date, shareholder name, and amount paid. Keep these for at least six years.
Source: HMRC SAIM5000 - Savings and Investment Manual: Dividends
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