Limited companies may decide to distribute their retained profits to shareholders. It is a popular method for directors to draw down funds. Here, we look at how dividends are taxed and how to ensure you declare dividends correctly.
How do you declare dividends?
You can only distribute funds from your company’s retained profits. Before distributing funds to shareholders, you must account for all outgoings (such as Corporation Tax liability, VAT and expenses).
If you have online accounting (such as FreeAgent), you can see exactly how much retained profit your company has available to distribute at any time.
You need to ensure that you have uploaded all of your invoices and expenses to ensure this figure is accurate. If you don’t have online access to this information, your accountant can provide an accurate figure.
How dividends are taxed
All dividends are subject to dividend tax, which is split into three bands according to which tax band the dividend income falls into. If dividend income falls between bands, you pay the appropriate rate for the amount falling in each band.
| Income Tax Band | 2025/26 | Dividend Tax Rate |
|---|---|---|
| Basic | £0 - £37,700 | 8.25% |
| Higher | £37,701 - £125,140 | 33.75% |
| Additional | £125,140 or more | 39.35% |
Unlike salary, dividends are not subject to National Insurance Contributions, which is why many limited company directors opt to remunerate themselves with smaller salaries and take the main chunk of their income in the form of dividends.
What is the dividend allowance?
A dividend allowance applies to the first £500 of dividends. Although this means that the first £500 of dividends you receive are not taxable, this doesn’t reduce the overall level of income you receive for tax purposes.
Despite being in place for just two years, the Government reduced the dividend allowance from £5,000 to £2,000 on April 6th 2018. The Allowance was cut further to £1,000 from April 6th, 2023, and to £500 from April 6th, 2024.
What paperwork do I have to complete?
A limited company must hold a board meeting, during which the directors decide to declare a dividend and record this decision in the meeting minutes.
The company has to provide all shareholders with a dividend voucher which details:
- The date of the dividend distribution.
- The limited company’s name.
- Name and address of the shareholder.
- The number of shares held by the shareholder.
- The total dividend payable.
- A director’s signature.
You should post (or email) the voucher to all shareholders. Some online accounting packages will automatically generate vouchers for you.
How often can my company declare dividends?
No rules determine how often you can declare dividends, although some suggest not declaring them too often to prevent regular distributions from appearing to be ‘disguised salary’.
Many small limited owners tend to pay dividends quarterly or biannually and opt to pay themselves a monthly salary.
What if you overpay dividends?
If you distribute dividends above the level of retained profits, they are illegal (‘ultra vires’).
Your accountant should be able to rectify errors by ensuring incorrect payments are repaid and adjustments are made to the company’s Directors’ Loan Account.
However, it is far easier to take extra care and only make legitimate payments in the first place.
Dividend tax calculator
Find out how much tax you will be liable for in the current tax year – we recommend this dividend tax calculator.
Some company director dividend FAQs
Can I pay dividends if my company didn’t make a profit in its latest year’s accounts?
Possibly. Dividends must come from cumulative retained profits, not just this year’s figures. If you have sufficient retained profits, regardless of when they were generated, you can distribute them. Verify the exact figure in your accounting software.
Do I have to include dividends on my Self Assessment tax return?
Yes. You must report all dividend income, even if it’s below the £500 allowance. HMRC uses this to calculate your total income for the year, so it’s important to include it on your return.
Can I pay dividends to a non-working shareholder (like a spouse)?
Yes. As long as they own shares in the company, they’re entitled to dividends. This is a common way to make the most of both partners’ personal allowances, but your share structure must be properly set up in the first place.
What happens if I forget to issue dividend vouchers?
It’s a legal requirement to document all dividends. If you forget, your accountant can help create backdated vouchers, but it’s best to keep records in real time. Most accounting software will automatically generate vouchers (and board minutes) automatically.
Are interim and final dividends taxed differently?
No. All dividends are taxed the same way. The only difference is procedural: interim dividends are declared by the directors during the year (often monthly or quarterly), while the shareholders approve final dividends after the year-end.
Can I reinvest retained profits instead of paying dividends?
Yes. You don’t have to distribute profits. Many directors leave money in the company to cover future expenses, invest in equipment, or smooth out income across quieter periods.
Will dividends affect my Child Benefit or Student Loan repayments?
They might. Dividend income is included in your total taxable income, which can push you over thresholds for Child Benefit tax charges or Student Loan repayments.
