A dividend is a payment made from a company to its shareholders from its profits. It is usually the most tax efficient way for shareholders to be paid by the company.
The company can pay the shareholders any amount in dividends, provided the payment comes from the company’s available post-tax profits. There are no rules about the frequency of dividends.
Key Considerations include:
Available Profits: Dividends must only be paid from profits the company has made after Corporation Tax and all other expenses have been accounted for. Paying more than your retained profits is an illegal distribution and can lead to penalties.
Tax Efficiency: Most directors combine a low salary with dividends to minimise National Insurance Contributions (NICs) and Income Tax liabilities.
Dividend Allowance: For the 2025-26 tax year, the tax-free dividend allowance is £500. This is separate from the standard Personal Allowance (£12,570 for 2025-26).
Tax Rates: Once you exceed the £500 dividend allowance, the tax you pay depends on your income tax band – for 2025/26:
Up to £50,270 Basic rate: 8.75%
£50,271 – £125,140 Higher rate: 33.75%
Over £125,140 Additional rate: 39.35%
IR35 Rules: If any of your contracts fall inside IR35 legislation, the income from those contracts must be taken as a salary and not dividends.
Procedures: There are procedures to follow when paying dividends, to comply with company law and HMRC requirements. To pay a dividend, you must hold a directors’ meeting to ‘declare’ the dividend, keeping minutes of the meeting, even if you are the only director. You must also issue dividend vouchers for each dividend payment the company makes. This must include: the date; company name; names of the shareholders being paid a dividend; amount of the dividend. A copy of the voucher must be given to the recipients of the dividend and a copy must be kept for the company’s records.
Directors’ Loans: if you take more money out of a company than you have put in – and it is not salary or dividend – it is classed as a ‘directors’ loan’. If your company makes directors’ loans, you must keep records of them. There are also some detailed tax rules about how directors’ loans are handled, which can result in the company paying up to 33.75% of the loan amount in corporation tax, depending on how much the loan is and when it is paid back. Watch out for our next Fundamental Series article which will cover the detail of Directors’ Loans.
