Limited companies of all sizes can distribute their profits to shareholders as dividends. This article explains what dividends are, how they are taxed, and how to properly account for them.
This guide has been updated for the 2024/25 tax year.
What are dividends?
- If a limited company has made a profit, it is free to distribute these funds to its shareholders. This is the money the company has remaining after paying all business expenses and liabilities, including any outstanding taxes (such as Corporation Tax and VAT).
- This retained profit may have been accumulated over time, and any excess profits not distributed as dividends simply remain in the company’s bank account.
- Individuals don’t pay National Insurance Contributions (NICs) on dividends, whereas they do on salaries.
- Dividends are distributed to shareholders according to the percentage of company shares owned, i.e. if you own half the company’s shares, you will receive 50% of each dividend distribution.
How to calculate the tax payable on dividends
You pay any tax owed on dividend income via self-assessment. Any tax due should be paid by the end of January of the following year.
Tax is applied to dividend income as follows:
| Tax Band | 23/24 Tax Rate | 24/25 Tax Rate | |
|---|---|---|---|
| Personal Allowance | £0 – £12,570 | 0% | 0% |
| Basic | £12,571 – £50,270 | 8.75% | 8.75% |
| Higher | £50,271 – £125,140 | 33.75% | 33.75% |
| Additional | £125,141+ | 39.35% | 39.35% |
In the 2024/5 tax year, a £500 dividend allowance is also provided, which means the first £500 of dividends are not taxable. However, this allowance does not reduce the total income figure upon which you are taxed.
HMRC taxes dividend income after all other income sources have already been taxed, e.g. your salary and other relevant income (from savings or investments).
So, your dividends will fall into one or more of the tax bands listed above, after your personal allowance and other sources of income have been taxed.
Dividend tax example – £9,100 salary + £41,170 dividends
Here are the steps to calculate the dividend tax owed during 2024/25 – for a company owner paid £9,100 salary and drawing down the rest of the basic rate tax band (£41,170) in dividends.
This combination of salary + dividends avoids the higher rate tax band altogether.
- The first £9,100 of income is tax-free (within the £12,570 personal allowance).
- The next £3,470 of dividends is tax-free (within the £12,570 personal allowance).
- The next £500 is covered by the dividend allowance but still uses up £500 of the basic rate band.
- The next £37,200 of dividends are taxed at the basic dividend rate (8.75%) = £3,255.
- In this example, the total dividend tax payable is £3,255.
Dividend tax example – £12,570 salary + £37,700 dividends
Here are the steps to calculate the dividend tax owed during 2024/25 – for a company owner paid a salary of £12,570 and drawing down £37,700 in dividends.
This combination of salary + dividends avoids the higher rate tax band altogether.
- The first £12,570 of income is tax-free (within the personal allowance).
- The first £500 of dividends is tax-free (the dividend allowance).
- The next £37,200 of dividends are taxed at the basic dividend rate (8.75%) = £3,255.
- In this example, the total dividend tax payable is £3,255.
Dividend tax example – £12,570 salary + £50,000 dividends
Here are the steps to calculate the dividend tax owed during 2024/25 – for a company owner paid a salary of £12,570 and drawing down £50,000 in dividends.
- The first £12,570 of income is tax-free (within the personal allowance).
- The first £500 of dividends is tax-free (the dividend allowance).
- The next £37,200 of dividends are taxed at the basic dividend rate (8.75%) = £3,255.
- The remaining £12,300 of dividends are taxed at the higher dividend rate (33.75%) = £4,151.25
- In this example, the total dividend tax payable is £7,406.25.
Tax on dividends – online calculators
Use our dividend tax calculators to calculate the additional tax you must pay at self-assessment time.
Dividends – getting the paperwork right
Board meeting minutes
If you want to declare a dividend, the company’s directors must hold a board meeting to agree on the distribution.
You must also keep the minutes of the meeting in your company records, even if you are a sole director.
Dividend vouchers for shareholders
The directors must provide each shareholder with a dividend voucher alongside the limited company paperwork.
An electronic voucher (e.g., one attached via email or automatically generated by an accounting software package like FreeAgent) is perfectly acceptable these days if shareholders have previously agreed upon it.
The voucher should include:
- The date
- The company name
- The name and address of the recipient
- The total number of shares owned by the shareholder
- The total dividend payable to the shareholder
- Director’s signature
You must maintain the correct paperwork – including paper records of board meeting minutes, as you may need to produce them if you are selected for an HMRC investigation.
View our example dividend paperwork templates.
How often should you declare dividends?
Accountants often suggest processing dividend payments quarterly for easier record-keeping, but there are no rules determining how often dividends should be distributed.
It is crucial to remember that all dividend distributions must be legal. This means that the company has sufficient retained profit to cover them. Otherwise, they will be classified as illegal or ‘ultra vires’, and HMRC penalties could be imposed.
Dividends and tax planning
Limited company owners have the advantage of being able to determine the timing and amounts of dividend payments.
This flexibility can aid in tax planning, such as delaying the distribution of profits until a year when you expect to earn less than normal.
Additionally, if you split ownership of your company with a spouse who has no other source of income or modest earnings, you can take advantage of their tax allowances and pay less higher rate tax as a couple.
What is a dividend waiver?
One or more shareholders may waive their rights to receive a dividend, so a dividend is distributed to some, but not all, shareholders.
Take great care when considering using a dividend waiver. If this is not done for genuine commercial reasons (such as ensuring that the company retains sufficient capital after the distribution), you may attract the attention of HMRC.
Read our guide to dividend waivers, and how they work.
IR35 and dividends
If your contract work is caught by IR35, you will have to draw down the bulk of your company’s income as a ‘deemed salary’ after allowing for a fixed 5% ‘administration allowance’ for the costs of running the company.
Please note that you can only claim this allowance from April 2021 onwards if you are contracting with a ‘small’ private sector client.
You must also pay full PAYE income tax and NICs on this deemed salary – at the same rates permanent employees pay.
So, if you work as a limited company contractor, make IR35 compliance a key priority, as the financial consequences of being caught are significant.
Further information
- Find out the most tax-efficient way to pay yourself as a limited company owner, in terms of salary + dividends.
- Find out more about the different taxes a typical contractor has to pay (either as a limited company, or an umbrella employee).
- Please use this article as a guide only, and make sure you choose a specialist contractor accountant if you have any questions about how dividends work, dividend timing, and how best to set up your company’s share capital.
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