What Are Dividends and How Do They Work?

Who this guide is for

This guide is for UK limited company directors and shareholders who want to understand how dividends work.

It is especially useful for owner-managed companies where the director is also the shareholder.

What is a dividend?

A dividend is a distribution of company profit to shareholders.

If a company has made profit and has enough distributable reserves, it may decide to pay dividends to shareholders. The payment belongs to the shareholder because they own shares in the company.

Dividends are paid after considering the company's profit position. They are not an expense that reduces Corporation Tax in the same way as salary.

Dividends vs salary

Salary is paid for work and is usually processed through payroll. It can involve PAYE, Income Tax, employee National Insurance and employer National Insurance.

Dividends are paid to shareholders because they own shares. They are not payroll and do not attract National Insurance in the same way as salary.

However, dividends can still be taxable personally.

When can a company pay dividends?

A company should only pay dividends from available profits.

Directors should check the company's accounts, current profit, retained earnings, Corporation Tax provision and cash flow before paying dividends.

If a company pays dividends without enough profit, those dividends may be unlawful or need to be corrected.

Dividend paperwork

Dividends should be documented properly.

Typical records include:

• board minutes or written approval
• dividend vouchers
• date of payment
• amount per share
• shareholder details
• company profit position

Good paperwork helps separate dividends from salary, loans or informal withdrawals.

How dividends are taxed

Individuals may pay tax on dividends above the dividend allowance. The rate depends on the person's Income Tax band.

For the 2026/27 tax year, GOV.UK shows dividend tax rates of 10.75% for the basic rate, 35.75% for the higher rate and 39.35% for the additional rate on dividends above the allowance.

Your total income matters because dividends are added to your other income to work out the tax band.

Dividends and Self Assessment

If you receive dividends, you may need to report them to HMRC. Directors and shareholders often need to check whether Self Assessment applies.

This is especially important where dividends are a regular part of how the owner takes money from the company.

Common mistakes

A common mistake is paying dividends when the company has no available profit.

Another mistake is taking money from the company and calling it a dividend later without proper records.

Some directors also forget that dividends are personal income and may need to be reported.

Finally, companies sometimes pay equal dividends incorrectly where share classes or ownership percentages have not been considered properly.

What to do next

Before paying dividends:

1. Check company profits and retained earnings.
2. Allow for Corporation Tax and other liabilities.
3. Confirm share ownership.
4. Prepare dividend paperwork.
5. Record the payment correctly.
6. Check the shareholder's personal tax position.