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 2025/26 dividend tax rules and includes the rate increases scheduled for April 2026.

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 distributed in proportion to share ownership.
• 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 illegal or ‘ultra vires’ dividends.

These must be repaid and reclassified in the company accounts; otherwise, the company will face HMRC penalties.

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.

Dividend allowance

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

For the 2025/26 tax year, the dividend allowance is £500.

The first £500 of dividend income is therefore tax-free. 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.

Here are the current dividend tax bands (2025/26):

Dividend tax rates from April 2026

Dividend tax rates will increase from the 2026/27 tax year.

The increase adds two percentage points to the basic and higher dividend tax rates. The additional rate will remain unchanged.

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

How to pay tax on dividends

Dividend tax is normally paid via the Self Assessment process.

If you are a director, you need to report any dividend income alongside any other income sources for each relevant tax year.

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

For example, dividends received during the 2025/26 tax year must be reported and 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.

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 and address
• the number of shares owned
• the dividend amount
• the director’s signature

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.

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, the company may face additional tax charges if the amount is not repaid within a pre-defined time period.

Directors often declare a dividend later in the year to clear the loan account balance.

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

IR35 and dividends

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

Where a contract falls inside IR35, most of the income from that engagement must be treated as employment income.

The contractor receives that income through payroll, with Income Tax and National Insurance deducted.

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 depends on their IR35 status.

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 with different tax positions.

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

The key rule running through this guide is simple: dividends should be declared only when sufficient profits exist, 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.