What is a dividend?
A dividend is a payment a company makes to its shareholders out of profits that have already had Corporation Tax deducted.
What a dividend means
When a limited company makes a profit and pays Corporation Tax, it can keep the rest or distribute it to shareholders as dividends. In owner-managed companies, dividends are usually how directors take most of their income, because dividends carry no National Insurance.
Dividends must be paid out of distributable reserves: retained earnings built up from past profits after tax. Cash in the bank is not enough. They are paid in proportion to shareholdings within a share class, declared by the directors (interim dividends) or approved by shareholders (final dividends), and recorded with board minutes and a dividend voucher.
How dividends are taxed in 2026/27
| Band | Rate |
|---|---|
| Dividend allowance | First £500 at 0% |
| Basic rate band | 10.75% |
| Higher rate band | 35.75% |
| Additional rate band | 39.35% |
Dividends sit on top of your other income, so salary uses up the personal allowance and bands first.
Example
A director takes a £12,570 salary and £30,000 of dividends. The salary uses the personal allowance. Of the dividends, £500 is covered by the allowance and £29,500 falls in the basic rate band, so dividend tax is 10.75% × £29,500 = £3,171.25. There is no NI on the dividends.
Why it matters for your business
Paying dividends without enough reserves is unlawful, and HMRC can treat the money as a loan from the company, which brings its own tax charges. Taking regular "dividends" without paperwork often ends up as an overdrawn director's loan account. Check reserves using up-to-date management accounts before declaring.
Dividends over £10,000 must be declared on a Self Assessment return, with the tax due by 31 January after the tax year. Between £500 and £10,000, if you are not already in Self Assessment, you can instead tell HMRC by phone or through your personal tax account and the tax is collected through your tax code. Directors with large dividends can be caught out by payments on account the following year.
The paperwork
For each dividend, prepare board minutes recording that the directors considered up-to-date figures and confirmed there were enough distributable reserves, and issue a dividend voucher to each shareholder showing the date, company name, shareholder, number of shares and amount. Pay the money to the shareholder's own account, not as a loose transfer, so the books match the paperwork.
Common questions
As often as you like, provided the company has enough distributable reserves each time and you record each dividend properly with minutes and a voucher. Many directors take them monthly or quarterly alongside a salary.
No. Dividends are not earnings, so neither you nor the company pays National Insurance. That is the main reason a small salary plus dividends is usually more tax efficient than a large salary for company owners.
No. Dividends are paid from profit after Corporation Tax, so they are not a deductible expense. Salary and employer pension contributions, by contrast, are deductible. That is why a mix of salary, pension and dividends is usually planned together.