If your limited company has retained profits, after expenses and taxes have been paid, these funds can be distributed to the company’s shareholders as dividends.
Dividends are a common way for directors to extract profits tax-efficiently from their companies.
Here, we explain how dividends work, how to account for them, and how much tax you must pay.
Most company directors are paid a small salary. The rest of their income can be drawn down as dividends, which are free from National Insurance Contributions.
It is worth noting that this benefit has been reduced significantly in recent years, firstly by the April 2016 dividend tax hike, and secondly by the April 2023 Corporation Tax increase.
Limited company directors can still benefit from tax planning options unavailable to employees. For example, shares can be gifted to a spouse to make use of their tax allowances if they are a non-taxpayer or on a lower rate.
Dividend distributions can also be deferred to future tax years to minimise exposure to higher and additional income tax rates.
How dividends work
What size of dividend can my company distribute?
To calculate the available profits your company can distribute to its shareholders as dividends, you should deduct all company expenses (salary, taxes, expenses, accountancy fees, etc.) and other costs from your company’s turnover.
You are free to distribute any post-tax ‘retained profit’ in the form of dividends to shareholders, in proportion to the percentage of shares they own in the company.
Most contractor accounting software will show you how much profit is available to distribute at any given time.
This is a simplistic explanation; you should, of course, contact your accountant to ensure that you only distribute funds legitimately, otherwise they will be ‘ultra vires’ (unlawful) and subject to possible HMRC penalties.
Dividend tax explained
How much tax do you pay on dividends? (2025/6)
Dividend tax is applied at the following rates, according to the tax bands they sit within.
Basic Rate (8.75%)
Higher Rate (33.75%)
Additional Rate (39.35%)
A tax-free ‘dividend allowance’ applies to the first £500 of dividends. This allowance falls within your overall tax band – it is not in addition to your income thresholds.
Dividends are taxed after all other sources of income have been accounted for, including salary, interest, rental income, and pensions. You must declare dividend income on your annual Self Assessment tax return.
You can find out how to work out your personal tax liability on dividends you receive by using IT Contracting’s dividend tax calculator.
Dividend paperwork and timing
Dividend paperwork
When paying dividends from your limited company, you must prepare company board minutes for each dividend declaration.
Your accountant will typically assist with this, or your accounting software (e.g., FreeAgent, Xero) will generate them automatically for you.
You must also prepare a dividend voucher for each shareholder. Limited company dividends (for example, those of LSE-quoted companies) are treated the same way as all UK company dividends.
It is up to each company’s board to decide how often dividends are paid. Many small company directors choose to distribute dividends quarterly, but there are no formal restrictions on the frequency of declarations.
You don’t have to physically withdraw the funds straight away – declaring a dividend simply means you’ve agreed to distribute profits. The actual payment can follow later.
If you’re a higher or additional rate taxpayer, remember that personal tax will be due on dividend income. This must be paid via Self Assessment each year.
Common dividend issues
Can I pay dividends if my company made a loss?
Yes – but only if your company has sufficient retained profits accumulated from previous years.
Dividends can only be paid from accumulated post-tax profits. Even if your company makes a loss this year, you can still declare dividends if you have retained profits carried forward from earlier years.
If your company has no retained profit available, then no dividends can be declared legally.
What happens if I accidentally overpay dividends?
If you pay more than your retained profits allow, the excess may be treated as a director’s loan or as salary and taxed accordingly. This is why it’s important to check with your accountant (and your accounting software) first.
Can I reinvest profits instead of paying dividends?
Yes. You’re under no obligation to pay dividends. Many contractors choose to retain some profits in the company to distribute in future tax years, thereby using each year’s tax allowance efficiently.
Are dividend payments subject to National Insurance?
No – dividend income is not subject to National Insurance Contributions. This is one of the key reasons dividends are more tax-efficient than salary.
Can I pay interim and final dividends?
Yes. Interim dividends are declared by directors during the year. Shareholders typically declare final dividends at the end of the year, although this is less common in smaller companies.
Do I need to show dividend income on my Self Assessment tax return?
Yes. You must declare all dividend income, including that from your own company, on your personal tax return.
What’s the difference between retained profit and cash in the bank?
Retained profit is an accounting figure – your post-tax profits to date. Cash in the bank is your company’s available money. You need retained profit (not just spare cash) to pay a dividend legally.
