How to Pay Yourself in Dividends – UK Business Owners

What are dividends?

Dividends are a type of payment that a limited company makes to its shareholders. In other words, they are one of several ways for shareholders to extract money from the company. Dividends come from post-tax profits and are designed as a reward for investment in the company.

Who can receive dividends from a company?

Only shareholders (like owners or investors) in a limited company can receive dividends from the company as a share of its after-tax profits. Entitlement to dividends is usually based on the proportion of shares that they hold.

To be eligible for dividends, you must be a shareholder.
Company Directors may receive dividends, but only if they are shareholding directors – not all directors hold shares.

Why are dividends popular among shareholders?

Dividends are a popular remuneration method among company shareholders because they are taxed more lightly than salary, represent a flexible income option, and are paid from profits, not company expenses!

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Factor	Why dividends are popular
Tax efficiency	Dividends are taxed more lightly than salary (although this gap is closing). There is no national insurance (employee or employer). The dividend allowance also means you get some income tax free.
Flexible income	Shareholders choose when to take dividends so they can factor in cash flow, profit levels and their personal taxes.
Paid from profits, not costs	Dividends come from post-tax profits, not company expenses, so they don’t increase payroll costs or trigger employer liabilities.
Tax planning opportunity	Dividends allow shareholders to split income across tax years and stay within certain tax bands (e.g. combining with low salary for a better tax position).
They reward investment and risk	Dividends are a return on investment, not payment for services or work. They reward you for your investment and the associated risk.

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Dividends do not mean guaranteed income

Unlike a salary, dividends are neither automatic nor guaranteed. If the company has not made real distributable profits, it cannot pay dividends. This means you can’t always rely on dividends as fixed and consistent monthly income.

Legal requirements

To pay dividends, the company needs to have retained profits after all expenses and tax. They cannot be paid from turnover or cash in the bank, directors loan or expected profits.

Dividends are governed by company law, not just HMRC, and a formal decision needs to be made by the board (even if the board is just you!). Getting these steps wrong may lead to significant tax and legal issues.

How often should you pay dividends?

How often you should pay dividends depends on what works best for your company and personal needs. How often you pay them needs to factor in cash flow stability, tax considerations and the administrative effort involved in managing them.

Monthly dividends: These work for directors who want a regular, salary-like income and have predictable profits and strong cash flow.
Quarterly dividends: These align well with VAT quarters and accounting reviews, making it easier to ensure dividends are legal and affordable before paying them.
Ad Hoc dividends: These work well for businesses with irregular income, with maximum flexibility and reduced risk. They can lead to large, one-off tax bills if not planned properly.

Regardless of frequency, dividends should only be paid when the company has enough retained profit and cash.

Dividends should never put pressure on day-to-day business finances.

Do you pay tax on dividends?

Yes, dividends are taxable in the UK. Despite having a more attractive rate of tax than a salary (which is subject to Income Tax), dividends are not tax free.

Dividends must be declared on your Self-Assessment Tax Return.

What is the tax rate for dividends?

The rate of tax you pay on dividends depends on your personal Income Tax band. The higher band you sit in, the more tax you pay on dividends above your dividend allowance.

Dividends sit on top of your other income, which is why your salary affects how much dividend tax you pay.

Before April 2026

Basic rate taxpayers will pay 8.75% in dividend tax
Higher rate taxpayers will pay 33.75%
Additional rate taxpayers will pay 39.35%

After April 2026

The tax rates on dividends (as well as savings and property income) will rise by 2% for basic and higher rate taxpayers (10.75% and 35.75% respectively). Additional rate taxpayers will see no increase.

While significant sums for higher and additional rate taxpayers, these rates are still lower than the income tax rates for each bracket (40% for higher, 45% for additional).

What is the dividend allowance?

The dividend allowance, like the income tax free allowance, is a buffer that enables you to pay no tax on dividends up to a threshold.

The current dividend allowance is £500. This has been coming down in recent years but there are no currently announced plans for this to reduce further.

Dividend example: How to take £100k out of your company

Here’s a worked example of a remuneration plan consisting of salary and dividends. This is just an example. While a common set up, there are several other remuneration options that may also be included.

For this example:

Single director limited company.
Director wants to take £100k gross income out of the company.
The Director takes £12,570 salary (the personal tax-free allowance), with the remaining income topped up as dividends.

Step 1: (Small) Salary

The director receives a salary of £12,570.
This sits within the personal allowance, so the director pays no income tax and no employee National Insurance.
However, employer’s National Insurance is due on salary above £5,000. This applies unless the company is eligible for the Employment Allowance; otherwise, employer’s NI will be payable on the portion above the threshold.

Step 2: Topping up with dividends

If the target total income is £100k, the dividends needed are £87,430.
This is the amount declared as dividends, not the take-home figure.

Step 3: How the dividends are taxed

After salary, the dividend income is layered through the tax bands:

The first £500 at 0%
The basic rate band at 8.75% (10.75% after April 2026)
Higher rate band at 33.75% (35.75% after April 2026)

No additional rate dividend tax applies because total income is £100k (below the £125,140 threshold). Personal allowance is not lost.

Step 4: Personal taxes

On these dividends, the personal tax bill would be approximately £18,000-£19,000 in dividend tax, with £0 income tax on salary.

The director’s net personal income after tax would therefore be £81,000-£82,000.

Step 5: Company Profits needed

Remember, dividends are paid from post-corporation tax profits from the company. This must be factored into any remuneration planning.

With the above example, the company would need around £115,000-£120,000 in profit before director pay, depending on which corporation tax rate is applied.

Common dividend mistakes to avoid

Dividends are a really powerful tool in remuneration planning, but they must be carefully planned in a way that balances personal pay and tax management with the company itself.

Trying to pay dividends without the profits

Dividends can only be paid from retained profits. Paying them without profits will result in illegal dividends that may need to be repaid. Always check retained profits before every dividend and, better still, keep your management accounts up to date!

Forgetting dividend vouchers

A dividend voucher details a dividend payment and acts as formal evidence that a dividend was properly declared and paid. Without vouchers, dividends may be challenged and reclassified, increasing tax risk. Create a dividend voucher for every payment, even if you’re the sole director!

Not budgeting for dividend tax

Remember that dividend tax is not deducted at source, which could lead to some surprising self-assessment bills. You can prevent this by setting aside a percentage of each dividend in a separate tax savings account.

Confusing dividends with reimbursements

Mixing personal expenses, reimbursements and dividends makes a real mess of records and will trigger compliance issues. Always reimburse expenses separately and label all payments clearly (you can do this easily with the right software).

Overdrawing the director’s loan account

Don’t overdraw the director’s loan account to fund dividends. An overdrawn loan can trigger extra tax charges and penalties. You should monitor your director’s loan balance and clear it before the year end wherever possible.

There’s more to remuneration planning than salary and dividends

While salary and dividends are central to any remuneration plan, they are not the only tools at your disposal to extract money from a company in the optimal way. Pension contributions, trivial benefits, director’s loan interest, and even the use of an electric company car, are all potentially useful remuneration options.

Planning is everything. The good news is we can help you put the optimal remuneration plan together and update it regularly so that it always serves you well.