You can pay a dividend from your limited company only out of profit that remains after Corporation Tax, known as distributable reserves. For every dividend you must approve it at a board meeting, record a minute and issue a dividend voucher to each shareholder. Dividends are normally paid in proportion to shareholdings. The first £500 each year is tax free, after which dividend tax applies at 8.75, 33.75 or 39.35 per cent for 2025/26.
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Paying yourself in dividends is one of the main reasons people run a company rather than working as a sole trader. Done correctly it is efficient and completely legitimate. Done carelessly, with no profit behind it or no paperwork, a dividend can be reclassified by HMRC, taxed as salary or treated as a loan, and it becomes a frequent trigger for enquiry. This guide sets out how to do it properly.
What money can a dividend actually be paid from?
A dividend can only be paid from distributable profit, sometimes called retained earnings or distributable reserves. In plain terms this is the profit your company has made after all its costs and after Corporation Tax has been set aside, added to any profit carried forward from earlier years and reduced by any losses. If your company has £30,000 of profit and owes £6,000 in Corporation Tax, the money available for dividends is the £24,000 that remains, not the £30,000.
This is a legal test, not a cash test. Having money in the bank account is not the same as having distributable profit. You might be holding VAT, PAYE or Corporation Tax that belongs to HMRC. Before you declare a dividend you (or your accountant) should look at up to date figures and confirm the reserves genuinely exist. Our guide to Corporation Tax explained covers how that liability is worked out.
What paperwork is required for every dividend?
Two documents are needed each time, no matter how small the company. First, a board minute: the directors hold a meeting (a single director company can still minute a decision), agree that sufficient distributable profit exists, and record the decision to declare the dividend. Second, a dividend voucher for each shareholder receiving a payment. The voucher should show the date, the company name, the name of the shareholder, the number of shares and the amount of the dividend.
Keep both in your records. This is the evidence that the payment was a properly declared dividend rather than casual drawings. If you take money out through the year and only decide afterwards how to describe it, HMRC has every reason to challenge the treatment. Contemporaneous paperwork is your protection.
What is the difference between interim and final dividends?
An interim dividend is one the directors declare during the financial year, based on management figures showing enough profit is available. Most owner managed companies pay interim dividends, often monthly or quarterly. A final dividend is proposed after the year end, usually recommended by the directors and approved by the shareholders alongside the annual accounts.
The practical difference matters if circumstances change. An interim dividend can generally be varied or stopped before it is paid, whereas a final dividend, once approved by the members, becomes a debt the company owes. Whichever you use, the profit must be there at the point of declaration.
How much dividend tax will you pay?
Every individual gets a dividend allowance of £500 a year, so the first £500 of dividend income is tax free. Above that, the rate depends on which Income Tax band the dividends fall into once added to your other income.
For the 2025/26 tax year the rates are 8.75 per cent at the basic rate, 33.75 per cent at the higher rate and 39.35 per cent at the additional rate. From 6 April 2026 the ordinary and upper rates each rise by 2 percentage points, giving 10.75, 35.75 and 39.35 per cent for 2026/27 (the additional rate is unchanged). If you are weighing how to draw money from the company, our comparison of salary versus dividends works through the trade offs, and sole trader versus limited company looks at the bigger structural choice.
Do dividends have to match shareholdings?
Yes, as a general rule. Dividends are paid according to the proportion of shares each person holds, so two equal 50 per cent shareholders receive equal dividends. You cannot simply pay one shareholder more because they need the money that month.
The exception is where a company issues different classes of shares, often called alphabet shares (A shares, B shares and so on). Each class can then receive a different dividend, which gives flexibility where shareholders have different circumstances. This can be legitimate, but it needs to be set up correctly with the right share rights, and HMRC will look closely at arrangements that appear designed purely to divert income. Take proper advice before going down that route.
What happens if you pay an unlawful dividend?
A dividend paid when the distributable profit is not there is unlawful, sometimes described as ultra vires. This is more common than people think, particularly when a business draws steadily through the year and the final accounts show the profit fell short.
The consequences vary. HMRC or your accountant may reclassify the payment. It could be treated as additional salary, bringing Income Tax and National Insurance into play, or as a loan to the director. If it is a loan and it is not repaid within nine months and one day of the year end, the company faces a section 455 tax charge of 33.75 per cent on the outstanding balance, refundable only once the loan is cleared. A shareholder who knew, or ought to have known, that the dividend was unlawful can also be required to repay it to the company. Our guide to the director’s loan account explains how overdrawn balances are taxed.
Unlawful dividends and director’s loan account issues are one of the most common areas HMRC opens an enquiry into, and the professional costs of defending your position can mount quickly even when you have done nothing deliberately wrong. A Solar Protect tax investigation policy covers up to £100,000 of your own accountant’s fees with no excess, so your adviser can respond fully on your behalf. Get a quote today, or read more in our accountancy and tax guide.
Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.