What is a Dividend?

A dividend is a payment made to a company's shareholders from its profits. When a limited company makes money, those profits belong to the business rather than to its directors personally. Dividends are one of the main ways those profits are distributed to the people who own the company.

For many limited company directors, dividends form a significant part of how they pay themselves. Understanding how they work, how they're taxed, and what the correct process looks like is worth getting right from the start.

Key Takeaways

• A dividend is a distribution of company profits to shareholders, paid only after Corporation Tax has been deducted.
• The dividend allowance is £500 per tax year, the amount of dividend income you can receive before dividend tax applies, on top of your personal allowance.
• From April 2026, dividend tax rates are 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
• Dividends must be paid in proportion to shareholding, with all shareholders in the same share class receiving the same rate per share.
• To pay a dividend correctly, directors must hold a meeting to declare it and issue a dividend voucher to each shareholder; dividends cannot be treated as a Corporation Tax business expense.

How Do Dividends Work?

Before any dividends can be paid, the company needs to have made a profit. Not turnover, not revenue, actual profit after Corporation Tax has been accounted for. What's left after that is called distributable profit, and that's the only pot dividends can legally come from. You can't pay dividends the company hasn't earned, and you can't jump the queue ahead of the tax bill.

How much each shareholder receives depends on how many shares they hold. If two people each own half the company, any dividend has to be split evenly between them on a per-share basis. You can't decide to pay one shareholder a higher rate than another if they hold the same class of shares, even if one of them does more work or needs the money more urgently. The shares determine the split, not the directors' preferences.

Timing-wise, dividends can be paid at any point during the year as an interim dividend, or at the end once the accounts are done as a final dividend. A lot of directors do both, taking smaller amounts throughout the year and then reviewing the position at year end.

Are Dividends Tax Efficient?

The short answer is yes, but less so than they used to be.

Dividends don't attract National Insurance contributions, which is the main reason so many directors use them alongside a small salary. That difference adds up quickly as income grows, making it a tax-efficient way to take money out of a company compared to putting everything through PAYE.

The dividend allowance has been cut significantly over the years, from £5,000 in 2016 down to £500 now, meaning a much larger portion of dividend income is taxable than it once was. Dividend tax rates also increased in April 2026.

Current dividend tax rates (2026/27):

• Basic rate taxpayers: 10.75%
• Higher rate taxpayers: 35.75%
• Additional rate taxpayers: 39.35%

These rates apply to dividend income above the £500 allowance, after your other income has been taken into account. Because dividends sit on top of salary and other income in the tax calculation, your overall income picture determines which band they fall into.

One thing worth noting: dividends can't be counted as a business expense. Corporation Tax is calculated on profits first, and dividends are paid from whatever remains. There's no way to use them to reduce the company's tax bill.

Tax rates and allowances change, so speaking to an accountant about the approach that works best for your situation is always worth doing rather than relying on general rules of thumb.

How to Pay Dividends

There's a proper process for paying dividends and it's worth following it correctly, even in a one-person company.

Hold a directors' meeting

Before paying a dividend, directors must hold a meeting to formally declare it. This applies even if you're the only director. The meeting doesn't need to be lengthy or formal, but it does need to happen and be properly recorded.

Minute the meeting

You must keep minutes of the meeting. These are a written record that a dividend was agreed, the amount, and when it will be paid. Again, even if you're the sole director, this step matters. HMRC can ask to see these records.

Issue a dividend voucher

For each dividend payment, you need to prepare a dividend voucher. This is a document that sets out:

• The date of the payment
• The company name
• The names of the shareholders receiving the dividend
• The amount of the dividend per share and in total

Every shareholder receiving the dividend must be given a copy of their voucher, and the company must keep a copy for its own records. These documents are important at tax return time, so keeping them organised from the start saves a lot of hassle later.

Dividends vs Salary: What's the Difference?

Most limited company directors pay themselves a combination of a low salary and dividends rather than taking everything through PAYE. The reason is straightforward: salary is subject to both income tax and National Insurance contributions, while dividends are only subject to dividend tax and have no National Insurance element.

A typical approach is to pay a salary up to or around the personal allowance threshold, then take the remainder as dividends. The exact figures that work best vary depending on total income, other sources of earnings, and personal circumstances, so it's worth modelling this with an accountant rather than assuming the same approach works for everyone.

For a fuller comparison of the two approaches, take a look at our guide on paying yourself as a director of a limited company.

FAQs

What is a dividend?

It's a payment made to shareholders from a company's profits. After the company has paid its Corporation Tax, any remaining distributable profit can be paid out to shareholders as dividends. The amount each shareholder receives is proportional to the shares they hold.

Can I pay myself dividends from my limited company?

Yes, if you're a shareholder of your own limited company, you can receive dividends. Most director-shareholders do this as part of their overall income strategy alongside a salary. You can only pay dividends from profits that exist after Corporation Tax has been accounted for.

How much dividend can I take tax-free?

The dividend allowance for the current tax year is £500. Dividend income up to this amount is taxed at 0%. On top of this, any dividend income that falls within your unused personal allowance (£12,570 for most people) is also tax-free. So if dividends are your only income, you could receive up to £13,070 before paying any tax.

What are the current dividend tax rates?

From April 2026, dividend tax rates are 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. These rates apply to dividend income above the £500 allowance, after your other income has been taken into account. Tax rates can change, so it's worth checking the current figures with an accountant or on GOV.UK.

Do I pay National Insurance on dividends?

No. Unlike salary, dividends are not subject to National Insurance contributions. This is one of the main reasons many limited company directors use dividends as part of their income strategy.

How often can I pay dividends?

There's no set rule on frequency. You can pay them monthly, quarterly, annually, or at any other interval, as long as the company has sufficient distributable profits at the time of each payment. Many directors pay themselves a monthly dividend alongside their salary to keep things straightforward.

What is a dividend voucher?

It's the document you must issue every time a dividend is paid. It records the date, the company name, the shareholders receiving the dividend, and the amount. Every recipient must be given a copy and the company keeps one too. These are important records for tax purposes.

Can dividends be counted as a business expense?

No. Dividends are paid from profit after Corporation Tax has been calculated. They're not an allowable business expense and can't be used to reduce your Corporation Tax bill.

What happens if I pay a dividend when the company doesn't have enough profit?

This is called an unlawful dividend. If you pay dividends from money that isn't distributable profit, it becomes a debt owed by the shareholders back to the company. HMRC can also challenge it. Keeping clear accounts and checking your profit position before declaring a dividend avoids this problem.

Do I need to report dividends on my Self Assessment?

If your dividend income is above the £500 allowance, yes. If your total dividend income exceeds £10,000, you'll need to file a Self Assessment return. If you don't normally file one, you'll need to register with HMRC by 5 October following the end of the tax year in which you received the income.

This article is for general information only and does not constitute financial or tax advice. Dividend tax rates and allowances change regularly, and the right approach will depend on your individual circumstances. Always speak to a qualified accountant before making decisions about how to pay yourself from your company.