Dividend guide for limited company directors and contractors

Limited companies can distribute their profits to shareholders as dividends. For many small company directors, dividends are the main source of income from their business.

This guide explains how dividends work, when they can be paid, how they are taxed, and the paperwork company directors must keep.

The guide reflects the current 2026/27 dividend tax rules and also shows the rates that applied in 2025/26.

What are dividends?

If a limited company generates a profit, it may distribute part of those profits to shareholders as dividends.

Dividends represent the funds remaining in the company after it has paid:

• operating expenses.
• salaries and staff costs.
• Corporation Tax.
• any other liabilities.

This remaining balance is often referred to as retained profit.

You don’t have to distribute the profits – they can remain in the company bank account indefinitely or be reinvested in the business.

Here are some key rules about dividends:

• Dividends can only be paid to the company’s shareholders.
• Directors only receive dividends if they also own shares in the company.
• Dividends are normally distributed according to the rights attached to the shares.
• Individuals do not pay National Insurance contributions on dividends.

As you don’t pay National Insurance on dividends, this is why many owner-managed companies rely on a combination of salary and dividends when paying directors.

When can a company distribute dividends?

Dividends can only be paid if the company has sufficient distributable profits.

Distributable profits are the accumulated profits remaining after the company has paid all liabilities, including Corporation Tax.

Directors need to check their company’s financial position before declaring dividends. This should be straightforward if you use accounting software.

If the company declares dividends when there are insufficient profits in the company accounts, they may be treated as unlawful dividends.

A shareholder who knew, or had reasonable grounds to believe, that a dividend was unlawful may be required to repay it to the company.

For this reason, if you are unsure about your company’s tax position, we always recommend checking with your accountant before making a dividend declaration.

You can also see the GOV.UK guidance on taking money out of a limited company.

Dividend allowance

Individuals receive a small tax-free allowance for dividend income.

For the 2026/27 tax year, the dividend allowance is £500.

The first £500 of dividend income is therefore taxed at 0%. The allowance does not reduce your total taxable income when determining which tax band applies.

Dividend tax rates

Dividends are taxed differently from salaries.

Dividend tax is calculated after your other income has been taken into account. This may include salary, interest, rental income, or other taxable earnings.

Your dividends are then taxed according to the band they fall into.

Dividend tax rates for 2025/26 and 2026/27

For many small company directors, the increase will add several hundred pounds a year to their dividend tax bill.

You can check the current and previous dividend tax rates on GOV.UK.

How to pay tax on dividends

Dividend tax is normally paid via the Self Assessment process.

If you already complete a Self Assessment tax return, you need to report any dividend income alongside any other income sources for each relevant tax year.

If you do not normally complete a tax return, you may be able to tell HMRC about dividend income of up to £10,000 without completing Self Assessment. Dividend income above £10,000 must be reported through Self Assessment.

Any tax due through Self Assessment must normally be paid by 31st January following the end of the tax year.

For example, dividends received during the 2025/26 tax year must normally be reported and any tax due paid by 31st January 2027.

Salary and dividends

Most small company directors are paid with a mixture of salary and dividends.

The salary is processed via PAYE (through the company payroll).

This helps ensure the director:

• maintains a National Insurance record (required for the state pension).
• qualifies for other state benefits.
• complies with payroll regulations.

The remainder of the company’s profits may then be distributed as dividends.

The salary/dividend mix is frequently used because:

• salaries are subject to Income Tax and National Insurance.
• dividends are only subject to dividend tax, not NI.

For this reason, dividends have historically been a tax-efficient way for company owners to withdraw profits, although the tax benefit has reduced significantly in recent years.

The exact salary/dividend mix directors take depends on a number of factors, including other sources of income and whether you own the company with your spouse.

You can read more in our salary vs dividends guide for contractors.

Declaring dividends

Dividends must be formally declared before they are paid.

Even if the company has a single director and shareholder, you must always record the decision to declare a dividend in the company’s minutes.

Typical steps include:

1. Confirm the company has sufficient distributable profits (via accounting software and your accountant if necessary).
2. Record the dividend decision in the company records (this can be created within your accounting software).
3. Issue dividend vouchers to shareholders (also automatically created via accounting software).
4. Transfer the dividend payment to shareholders.

These records may be requested if the company accounts are reviewed or if HMRC carries out a compliance check.

You need to provide all dividend paperwork to your accountant to help finalise your company accounts.

Dividend vouchers

Each dividend payment should be accompanied by a dividend voucher.

A dividend voucher confirms the amount distributed and the shareholder receiving the payment.

Typical information included on a voucher includes:

• the company name
• the dividend payment date
• the shareholder’s name
• the dividend amount

Many accounting software platforms now automatically generate dividend vouchers.

Electronic vouchers sent by email are widely accepted.

Shareholders should keep these vouchers for their personal tax records.

GOV.UK also sets out the dividend paperwork companies need to keep.

How often should dividends be paid?

There are no rules about how often dividends need to be declared.

Some companies pay them quarterly, others monthly, and some only once a year.

Quarterly payments are quite common because they keep the paperwork manageable and allow directors to check the company’s profit position at regular intervals.

Regardless of the frequency, each dividend payment can be made only if the company has sufficient retained profit.

The company, its shareholders, and directors are separate legal entities.

For this reason, directors should never treat the company bank account as a source for personal income until a dividend has been formally declared.

Dividend waivers

A dividend waiver allows a shareholder to give up their right to receive a dividend.

This may allow other shareholders to receive a dividend while one shareholder receives nothing.

Dividend waivers are sometimes used in family companies where shares are held by spouses or other relatives (these will often be alphabet shares).

For obvious reasons, these types of arrangements must be documented very carefully.

And if the waiver does not reflect genuine commercial circumstances – for example, if the waiver has only been made to take advantage of a lower-rate taxpayer’s unused allowances – it may attract scrutiny from HMRC.

We always recommend seeking professional advice before implementing dividend waivers.

Dividends and directors’ loan accounts

Directors sometimes withdraw funds from the company bank account before formally declaring a dividend.

These withdrawals are normally recorded in the company accounts as director’s loan account transactions.

If the loan account becomes overdrawn and is still outstanding nine months and one day after the end of the company’s Corporation Tax accounting period, the company may face a section 455 Corporation Tax charge.

For loans made on or after 6th April 2026, the section 455 rate is 35.75%.

Directors often declare a dividend later in the year to clear the loan account balance, provided the company has sufficient distributable profits.

This is another example of why you need to keep clear and accurate records at all times – and use accounting software.

See the GOV.UK guide to directors’ loans for the detailed tax rules.

IR35 and dividends

Our IR35 guide for contractors explains the rules in more detail.

IR35 can affect how contractors take income from their limited company.

For public sector and medium or large private sector clients, the client is generally responsible for determining whether the off-payroll working rules apply.

Where a contract falls inside the rules, the fee-payer normally deducts Income Tax and employee National Insurance before paying the contractor’s company.

Where a contractor works for a small private sector client, responsibility for determining IR35 status generally remains with the contractor’s intermediary, usually their limited company.

Where contracts fall outside IR35, company profits may still be distributed as dividends after business expenses and Corporation Tax have been accounted for.

For many contractors, the availability of dividend income therefore depends partly on their IR35 status.

HMRC’s off-payroll working guidance explains how responsibility for determining status changes depending on the client.

Dividends and tax planning

Company directors have flexibility over when dividends are paid and how much profit is distributed.

This flexibility can help with personal tax planning in ways that aren’t possible if you receive a salary alone.

For example, directors may:

• delay dividend payments until the following tax year.
• temporarily retain profits in the company.
• distribute dividends among shareholders according to the rights attached to their shares.

If you and your spouse both own shares in the company, dividends may be paid to both shareholders according to the rights attached to those shares. Each spouse is taxed individually according to their own tax band.

The key rule is always the same: dividends should be declared only when there are sufficient profits to distribute them, and proper records must be kept for every dividend payment.

If you have any questions about dividends, have a chat with your accountant or call us on 0207 096 2659 if you need further support.