What Are Dividends?
If you own shares in a company, you may receive dividends — a common way for companies to share their profits with shareholders. Dividends are a form of income and can be an attractive benefit for business owners and investors alike.
What Exactly Is a Dividend?
A dividend is a payment made by a company to its shareholders, usually taken from its after-tax profits. It’s essentially a reward for investing in the company and holding shares. The more shares you own, the larger your dividend payment.
Dividends can be paid:
- As a cash payment (most common)
- As additional shares (less common)
Who Can Receive Dividends?
Anyone who owns shares in a company is entitled to dividends when they are declared. In the case of small businesses — especially limited companies in the UK—dividends are often paid to company directors and shareholders as part of their income, alongside or instead of a salary.
Tax on Dividends
In the UK, dividend income is taxed separately from other income like wages or self-employment profits.
As of the 2025/26 tax year, you can earn £500 in dividends tax-free under the Dividend Allowance. Anything above that is taxed at:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
The exact rate depends on your overall income.
Why Are Dividends Popular?
Dividends can be a tax-efficient way for company owners to take money out of their business, especially when compared to higher-income tax rates on salaries. However, they must only be paid from profits, not from company losses or borrowed money.
In Summary
Dividends are a share of company profits paid to shareholders. They’re a key part of many business owners’ income and offer potential tax advantages when used wisely.
