Taking dividends from your company, what to do

Would you rather someone else handled this? Our limited company accounts service means year end accounts and the CT600 prepared and filed for you.

How to do it properly

1. Check the profit. A dividend must come from retained profit after corporation tax. Confirm it is there.
2. Hold a board meeting. Record the decision to declare the dividend in a board minute.
3. Issue a voucher. Give each shareholder a dividend voucher showing the amount and date.
4. Plan the tax. The first £500 is tax free, then the rate depends on your income band. Set money aside for the January bill.
5. Report it. Enter the dividends on your Self Assessment return and pay the tax by 31 January.

The rule that catches people out

A dividend can only be paid out of distributable profits, which means profit the company has actually made, after Corporation Tax, including profit retained from earlier years. Not turnover. Not what is in the bank.

Cash in the account is not the same thing as profit. Your bank balance might be holding VAT you owe, Corporation Tax you have not paid yet, and money from invoices that cover costs still to come. Pay a dividend out of that and you may be paying a dividend the company has not earned.

If you do, it is not a dividend. It is unlawful, it gets reclassified as a loan to you, and if that loan is still outstanding 9 months and 1 day after the year end the company pays section 455 tax at 35.75% of the balance for loans made on or after 6 April 2026. The company gets it back eventually, but only nine months after the year end in which you repay it.

What dividends cost you in 2026/27

The first £500 of dividends each year is taxed at 0%. Above that:

• 10.75% if the dividend falls in the basic rate band
• 35.75% if it falls in the higher rate band
• 39.35% in the additional rate band

The first two rates rose by 2 percentage points on 6 April 2026. If you are working from figures you looked up last year, they are out of date. On £30,000 of dividends taken by a higher rate taxpayer, that change alone costs about £590 more than it did in 2025/26.

Dividends sit on top of your other income when working out which band they fall in, so a salary uses up the basic rate band first.

The paperwork, which takes five minutes and matters

A dividend is a formal act, not a bank transfer with a reference on it. For each one you need:

• A board minute recording that the directors reviewed the position, were satisfied there were distributable profits, and declared the dividend.
• A dividend voucher for each shareholder showing the company name, the date, the shareholder, the number and class of shares and the amount.
• Accounts or management figures supporting the profit at that date.

If HMRC ever asks, this is what turns a bank transfer into a dividend. Without it, the transfer looks like salary that has not been through payroll, or a loan. Neither is where you want to be.

Getting the salary and dividend mix right

Most director shareholders take a modest salary and the rest as dividends. The logic is that salary is deductible against Corporation Tax and preserves your National Insurance record, while dividends avoid National Insurance altogether.

The numbers that drive it for 2026/27: the secondary threshold, where employer National Insurance starts, is £5,000, and the rate above it is 15%. The employee primary threshold is £12,570. A salary of £6,708 is enough to protect a qualifying year for the state pension.

The Employment Allowance of £10,500 would normally soak up the employer National Insurance, but a company with a single director and no other employee paid above the secondary threshold cannot claim it. So the right salary for a one person company is usually lower than the right salary for a company with two or more people on the payroll. This is planning, not HMRC guidance, and it is worth a five minute conversation rather than copying a figure off a forum.

Paying the tax, which is the part that hurts

No tax is deducted from a dividend when you take it. You declare it on your tax return and pay it by 31 January after the tax year end. If your bill goes over £1,000, you also start making payments on account, half the previous year's tax on 31 January and the same again on 31 July.

The first year of dividends is the one that stings, because the January payment can include the balance for the year just gone plus the first payment on account for the year you are in. Put money aside as you take each dividend rather than finding out in January.

What we would tell a client

Look at the profit before you declare, not after. Do the minute and the voucher every time. Set aside the personal tax the day the money lands, not the day the return is due. And check the rate you are working from, because it changed this April and a lot of published advice has not caught up.

Frequently asked questions