How do Limited Company dividends work?

Understanding how dividends work is key to running your Limited Company tax-efficiently and maximising your overall take-home pay. While it’s always wise to speak with your SG Client Director for tailored advice, having a solid grasp of the basics can help you make smarter financial decisions. 

In this blog, we’ll break down what dividends are, how they’re paid, and what you need to know as a Limited Company owner in the UK. 

What are dividends? 

Dividends are the distribution of company profits among its shareholders. As a Limited Company owner, you can pay yourself a salary and then supplement your income with dividends. 

The rules for taxing dividends are different from salaries, and many Limited Company directors will add their spouse / civil partner as a shareholder in their Limited Company, allowing them to draw more tax-free income from their company. 

When are you able to draw dividends? 

You’re able to draw dividends from your Limited Company at any time you wish, provided there are sufficient profits within the company. Drawing dividends when this is not the case would be considered an illegal dividend or director’s loan, potentially leading to an investigation by HMRC. 

Most Limited Company directors typically draw dividends monthly, quarterly, or annually, although it’s entirely up to you how often you draw dividends. Just be sure to keep the correct records when doing so, to ensure HMRC can’t class them as a ‘disguised salary’, should they decide to investigate. 

It’s essential to document your decision to declare a dividend through minutes, and you must provide all shareholders with a dividend voucher (if using FreeAgent it will create these automatically for you). This creates a clear audit trail, which is useful to have in case HMRC wish to take a closer look. Additionally, all dividend vouchers are required for your annual tax return. 

What are the tax and National Insurance Contribution (NIC) implications? 

Dividends do not incur NICs, therefore due to lower tax rates, and not being subject to NI, dividends can yield a better net take home if withdrawn in an efficient manner. 

The dividends you receive are taxed as personal income, and there’s a tax-free allowance of up to £500 per person. The current tax thresholds for the 2025/26 tax year for dividends are as follows: 

– Basic rate (taxed at 8.75%): up to £50,270 

– Higher rate (taxed at 33.75%): from £50,271 to £125,140 

– Additional rate (taxed at 39.35%): over £125,140 

A dividend is taxed at the point of declaration, not when it’s drawn, so timing your declarations is important. For instance, if you declare a dividend on April 1st, 2025, but it’s not paid until April 7th, it will be included in your 2024/2025 tax return. Depending on your previous withdrawals during that tax year, this could push you into a higher tax rate. 

Your SG Accounting Client Director will guide you through this, helping you keep track of the applicable tax rate, assessing if it’s worth drawing dividends, and determining the best timing for doing so. 

Final thoughts 

Please note that when declaring dividends, you will be paying these at gross to the shareholders. That means that any tax liability will need to be set aside personally and be paid via your self-assessment tax return. Any dividends declared in a given tax year will be payable by the following 31st January at which that tax year ends. For example, if declared in 24/25, the tax will be payable by 31st January 2026. 

If this is your first self-assessment tax return, and your liability is over £1,000, it is likely payments on account will trigger. If unaware, please reach out to your SG Client Director for more information. 

Dividends are deemed as taxable income and can be included in total taxable pay for references and mortgages, depending on the provider. 

Each person’s situation is unique, and your individual circumstances will dictate when and how you choose to draw dividends. Always seek advice from your accountant before withdrawing any money from your business account to ensure you’re taking the correct amount and following all the regulations and guidelines set out by HMRC. 

If you’re searching for a new accountant, get in touch with us at SG Accounting today.