Dividends Explained: A Guide for Limited Company Directors
Dividends are payments made by a limited company to its shareholders from available profits. They are a common way for owner-directors to take money from their company, often alongside a salary.
However, dividends cannot simply be taken whenever money is available in the bank. The company must have sufficient distributable profits after Corporation Tax and any losses brought forward.
Can Your Company Pay a Dividend?
Before declaring a dividend, directors should review current accounts or reliable management figures. A strong bank balance does not necessarily mean sufficient profit is available, because some cash may be needed for VAT, PAYE, Corporation Tax, loans or suppliers.
Dividends are not a deductible business expense and do not reduce the company’s Corporation Tax bill. Read our guide to Corporation Tax for more information.
Paying dividends without sufficient profits can result in unlawful distributions. The shareholder may need to repay the money, particularly where they knew the company could not support the dividend.
Dividend Paperwork
The company should formally declare each dividend and keep minutes of the directors’ decision. A dividend voucher should show:
- The company name
- The payment date
- The shareholder’s name
- The number or class of shares
- The dividend amount
Shareholders should receive dividends according to their rights and shareholdings. Different share classes can have different rights, but the company’s articles and share documentation must support this.
Dividend Tax for 2026/27
The dividend allowance is £500. Dividend income above available allowances is taxed at:
- 10.75% within the basic-rate band
- 35.75% within the higher-rate band
- 39.35% within the additional-rate band
Your other income is considered first when determining which rate applies. Dividends within the £500 allowance are taxed at 0%, but they still form part of total income and can affect tax bands and the withdrawal of the Personal Allowance.
Avoid Common Problems
Do not describe regular withdrawals as dividends retrospectively without checking profit and completing the paperwork. Amounts not covered by salary, expenses or valid dividends may be recorded through the director’s loan account, potentially creating additional tax consequences.
The most suitable combination of salary, dividends and pension contributions depends on the company’s profit and the director’s wider income. Our guide to paying yourself from a limited company explains the main options.
GMS Accountants helps limited company directors in Cambridge and Nottingham plan and document dividends correctly. Contact us for advice.
