As a company director, one of the most tax-efficient ways to extract profits from your business is through dividends. But while dividends can be a smart strategy, they come with rules and responsibilities. In this post, we’ll walk you through the essentials of taking dividends from your company—what they are, how they work, and what to watch out for.
What Are Dividends?
Dividends are payments made to shareholders from a company’s post-tax profits. Unlike salaries, they are not considered a business expense and must be paid out of retained earnings (i.e., profits after corporation tax).
If you’re a director and shareholder of your limited company, you can pay yourself a combination of salary and dividends to optimise your personal tax position.
When Can You Take Dividends?
You can only take dividends when your company has sufficient retained profits. This means:
- The company has made a profit after tax.
- There are no accumulated losses from previous years that wipe out current profits.
Paying dividends when there are no distributable profits is illegal and could lead to penalties or the need to repay the dividends.
How to Declare Dividends
- Hold a board meeting (even if you’re the only director).
- Record the decision in meeting minutes.
- Issue a dividend voucher showing:
- Date
- Company name
- Shareholder name
- Amount of the dividend
These steps are important for compliance and record-keeping, especially in the event of an HMRC enquiry.
Tax on Dividends
Dividends are taxed differently from salaries:
- The first £500 (2025/26) is tax-free under the Dividend Allowance.
- Above that, dividend income is taxed at:
- 8.75% (basic rate)
- 33.75% (higher rate)
- 39.35% (additional rate)
These rates are lower than income tax rates, which is why dividends are often preferred for extracting profits.
Tip: Taking a low salary (within the personal allowance and NIC thresholds) and topping up with dividends is a common strategy to minimise tax and National Insurance.
Pitfalls to Avoid
- Illegal dividends: Taking dividends without sufficient profits can lead to director’s loans or repayment obligations.
- Poor record-keeping: Always document dividend payments properly.
- Ignoring tax planning: Dividends can push you into a higher tax bracket if not planned carefully.
Final Thoughts
Dividends can be a powerful tool for directors to take money out of their company in a tax-efficient way. But they must be handled with care. At Elevate Accountancy, we help business owners like you structure your remuneration in a way that’s both compliant and tax-smart.
Need help planning your dividends?
Get in touch with us at Elevate Accountancy—we’ll help you make the most of your company’s profits while staying on the right side of HMRC.
Information co-created using Co-Pilot