- A company can only pay dividends from accumulated, realised post-tax profit, never from turnover or the cash sitting in its account.
- Every dividend needs a board decision and a dividend voucher for each shareholder, even in a single-director company.
- From 6 April 2026 the basic and higher dividend tax rates rose to 10.75% and 35.75%, while the £500 allowance and 39.35% additional rate stayed the same.
Understanding how dividends work is one of the first things you’ll face as a limited company director, and the rules are stricter than most people expect.
A dividend is a share of company profit paid to shareholders, but you can only pay one from accumulated, post-tax profit, and only after a proper board decision and the right paperwork.
This guide walks through the full process end to end: when your company is allowed to pay a dividend, who declares it, the paperwork you need, and how dividends sit alongside your salary. For the year-end side of it, you can have Sleek’s accounting service handle the accounts and filing where these dividends eventually land.
What is a dividend?
A dividend is a payment a company makes to its shareholders out of profit it has already earned and paid Corporation Tax on. It is not a wage and it is not a loan, it’s your share of the company’s profit as a shareholder.
Dividends carry no National Insurance, which is part of why directors use them alongside a small salary. The catch is that a dividend is only ever paid from profit the company genuinely has, which is where most of the rules come from.
The rest of this guide is about the practical side: how you actually declare and pay one without breaking those rules.
When can your company actually pay a dividend?
Your company can only pay a dividend when it has enough distributable profit, meaning accumulated, realised profit left over after Corporation Tax and any earlier losses. It is not your turnover, and it is not the cash sitting in your business account.
This catches a lot of new directors out. You might have £20,000 in the bank, but if most of that is owed in Corporation Tax and VAT, your distributable profit could be far lower.
To check, you look at retained profit on your balance sheet, not your bank balance. The test runs on the date you declare the dividend, so profit has to be there at that moment.
A few things that are not distributable profit:
- Money set aside for Corporation Tax on company profit
- VAT you’ve collected but not yet paid to HMRC
- Loans, grants, or director’s capital introduced to the business
- Cash that simply reflects unpaid supplier bills
If the profit isn’t there, paying anyway creates an unlawful dividend, which we cover further down.
How do you declare a dividend?
You declare a dividend through a directors’ decision, recorded formally, before any money moves. Even as a sole director, you can’t just transfer cash to yourself and call it a dividend after the fact.
There are two types:
- Interim dividends are declared by the directors during the financial year, usually at a board meeting (or a written resolution if you’re the only director).
- Final dividends are proposed by the directors and approved by shareholders, normally after the year-end accounts are prepared.
Most small companies pay interim dividends through the year because they’re simpler and flexible. The key point is that the decision comes first, the paperwork records it, and only then is the dividend paid.
What paperwork do you need to pay a dividend?
You need two documents every time: a record of the board decision and a dividend voucher for each shareholder. Skipping either is one of the most common compliance slips HMRC picks up on.
The board minutes record that the directors met (or resolved in writing), confirmed sufficient distributable profit, and agreed the dividend amount and date.
The dividend voucher is given to each shareholder and should show:
Field | What it records |
Date | The date the dividend is declared |
Company name | Your full registered company name |
Shareholder name | The recipient receiving the dividend |
Share class and holding | Which shares the payment relates to |
Dividend amount | The total paid to that shareholder |
Keep a numbered folder of every dividend voucher and minute as you go. Reconstructing them at year-end is painful, and HMRC can ask to see them years later.
Getting confused between dividends and an overdrawn director’s loan account is a frequent mistake. If you draw money the company can’t support as a dividend, it can be reclassified as a loan, which has its own tax cost.
How should you split salary and dividends?
Most director-shareholders take a small salary plus dividends, because the two are taxed and treated differently. Salary is a company expense that reduces Corporation Tax, while dividends are paid from post-tax profit and carry no National Insurance.
Here’s how the two compare at a glance:
Aspect | Salary | Dividends |
Paid from | Company income (before profit) | Post-tax distributable profit |
Taxed as | Employment income via PAYE | Dividend income via Self Assessment |
National Insurance? | Yes, employee and employer NIC may apply | No NIC |
Paperwork | Payroll and payslips | Board decision and dividend voucher |
Flexibility | Fixed, ongoing | Only when profit allows |
A common structure is a salary around the £12,570 personal allowance topped up with dividends. For the actual tax you’d pay on those dividends across the bands, see how much tax you’ll pay on dividends, which handles the rates in full.
If you’d rather avoid dividends in a lean year, taking money out as a director’s loan is sometimes used as a short-term option, though it comes with strict repayment rules.
What’s changed for dividends in 2026?
The big change is already in effect: from 6 April 2026, the basic and higher dividend tax rates rose by two percentage points. The mechanics of declaring a dividend haven’t changed, but the cost of taking one has.
For the 2026/27 tax year, dividend income above the £500 allowance is now taxed as follows:
Tax band | 2025/26 rate | 2026/27 rate (now in effect) |
Ordinary (basic) | 8.75% | 10.75% |
Upper (higher) | 33.75% | 35.75% |
Additional | 39.35% | 39.35% |
The £500 dividend allowance and the £12,570 personal allowance are both unchanged. In practice, a basic or higher rate director now pays around £20 more tax on every £1,000 of dividends than they did before 6 April 2026.
As a simple illustration, a director on a £12,570 salary taking £40,000 in dividends gets the first £500 tax-free, with the rest taxed across the bands it falls into. The exact figure depends on your full income, so treat that as illustrative only.
What happens if you get a dividend wrong?
Paying a dividend without enough distributable profit creates an unlawful dividend, and the consequences land on you personally. This is the part nervous directors should read twice.
If a dividend is paid out of profit that isn’t there, it can be challenged as ultra vires, meaning beyond the company’s lawful power. The company can be required to recover the money from the shareholder who received it.
The common ways directors trip up:
- Paying a dividend based on cash in the bank rather than retained profit
- Forgetting to deduct the Corporation Tax owed before declaring
- Backdating paperwork to cover a payment already taken
- Treating regular drawings as dividends without any board decision
HMRC can also reclassify an unlawful dividend as salary or as a director’s loan, which usually means more tax, not less. Getting the profit test and paperwork right from the start avoids all of it.
How Sleek helps with dividends
Dividends only really go wrong at the edges: the profit test, the paperwork, and how they land in your year-end accounts and tax return. That’s exactly where an accountant earns their fee.
Sleek prepares your year-end accounts and your director’s self-assessment, so the dividends you take are backed by real distributable profit and recorded properly. Instead of guessing whether you can pay yourself this quarter, you get a clear answer and clean records behind it.
Disclaimer: The preceding information is not legal advice. This content is aimed to provide general guidance. For more formal or legal advice, contact Sleek directly.
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FAQs on how dividends work
How often can I pay myself dividends?
There’s no legal limit on how often you can pay dividends, so directors commonly pay monthly, quarterly, or as a one-off. The only real constraint is that each dividend must be backed by sufficient distributable profit on the date you declare it, with the board decision and voucher in place each time.
Do I need an accountant to pay a dividend?
No, you can declare and pay a dividend yourself if you keep the paperwork right and confirm the profit is genuinely there. Many directors use an accountant because the risk sits in the detail, such as checking distributable profit after Corporation Tax and recording everything correctly at year-end.
Can I backdate a dividend?
No, you cannot backdate a dividend. The decision and paperwork must be dated when the dividend is actually declared, and the distributable profit must exist at that point. Backdating to cover money already withdrawn is a common error that can lead HMRC to reclassify the payment as salary or a director’s loan.
What is a dividend voucher?
A dividend voucher is the document given to each shareholder recording a specific dividend payment. It shows the date, your company name, the shareholder’s name, the shares involved, and the amount paid. Each shareholder should receive one for every dividend, and you keep a copy for your own records and tax return.
Can I pay different dividends to different shareholders?
It depends on your share structure. Shareholders holding the same class of shares must be paid the same amount per share. If you want to pay different amounts, you’d usually need different share classes, often called an alphabet share structure, set up correctly in advance rather than decided at the point of payment.
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Do dividends count as a company expense?
No, dividends are not a company expense. They are a distribution of profit the company has already earned and paid Corporation Tax on, so they don’t reduce your Corporation Tax bill. HMRC confirms your company does not get tax relief on dividend payments in its guidance on tax on dividends. This is a key difference from salary, which is a deductible expense paid before profit is calculated.
What’s the difference between an interim and a final dividend?
An interim dividend is declared by the directors during the financial year and is the type most small companies use. A final dividend is proposed by the directors and approved by shareholders after the year-end accounts are prepared. Both need a recorded decision and a voucher, but the approval route differs.
