Are Dividends Tax Deductible

Dividends are a popular way for company owners and shareholders to take income from their business. If you operate through a limited company, you may choose to take a small salary and receive the rest of your income through dividends. This method is often more tax efficient than taking a full salary, but it raises an important question: are dividends tax deductible?

The short answer is no. Dividends are not tax deductible for Corporation Tax purposes. They are distributions of a company’s post-tax profits and do not reduce the taxable profit reported on a company’s accounts. For directors and shareholders receiving dividends, they are treated as personal income and taxed separately under the dividend tax rules.

This article explains why dividends are not tax deductible, how they are treated in company accounts, and what this means for tax planning and profit extraction.

What Are Dividends?

Dividends are payments made by a company to its shareholders out of distributable profits. These are profits that remain after Corporation Tax has been paid. Dividends are not classed as business expenses, and they do not relate to the running costs of the business.

In small limited companies, directors often take a mix of salary and dividends to maximise tax efficiency. While salary is deductible for Corporation Tax and attracts PAYE and National Insurance, dividends are not deductible and are taxed differently when received by the shareholder.

Dividends can only be paid when the company has sufficient retained profits, and they must be issued in accordance with company law and shareholder agreements.

Are Dividends Deductible for Corporation Tax?

No. Dividends are not allowable as a deduction when calculating Corporation Tax. This is because:

• They are not incurred wholly and exclusively for the purposes of trade

• They are not payments for services or goods

• They are distributions of profit, not business expenses

When preparing company accounts, dividends are shown after the profit figure. They are not included in the profit and loss account as costs. Instead, they appear as a reduction in retained earnings on the balance sheet.

For example:

• Your company earns £100,000 profit

• Corporation Tax due is £19,000

• Post-tax profit is £81,000

• You declare £30,000 in dividends

• The £30,000 does not reduce the £100,000 taxable profit

The company pays Corporation Tax on the full £100,000, regardless of any dividend payments made to shareholders.

How Are Dividends Taxed for the Recipient?

While dividends are not tax deductible for the company, they are still taxable for the recipient.

If you receive dividends, you must report them on your Self Assessment tax return. Dividend income is taxed separately from other forms of income and benefits from its own allowances and rates.

For the 2024/25 tax year:

• The dividend allowance is £500

• Basic rate: 8.75% on dividends within the basic tax band

• Higher rate: 33.75% on dividends within the higher tax band

• Additional rate: 39.35% on dividends above £125,140 total income

For example, if you receive £10,000 in dividends and your total income is within the basic rate band:

• First £500 is tax-free

• Remaining £9,500 is taxed at 8.75%

• Dividend tax due: £831.25

Dividend income does not attract National Insurance, which is why many company directors choose to take dividends over salary.

Are Dividends Tax Deductible for the Shareholder?

No. Individuals cannot deduct dividend income from their personal tax bill as an expense. Dividends are classed as investment income, and the tax is calculated based on total income levels, not adjusted by deductions or reliefs (except where the personal allowance and dividend allowance apply).

If you reinvest dividends back into a business or portfolio, this does not make them deductible. They are still treated as taxable income in the year they are received.

Are Interim and Final Dividends Treated Differently?

Both interim and final dividends are treated in the same way for tax purposes. The difference lies in timing and formalities:

• Interim dividends can be paid at any point during the financial year, based on estimated profits

• Final dividends are declared after year-end, once accounts are finalised

Neither type is deductible for Corporation Tax, and both are reported in the same way on tax returns and company accounts.

You must record all dividends in board meeting minutes and ensure appropriate dividend vouchers are issued for each payment.

What About Dividends Paid to Family Members?

If your company pays dividends to family members who are also shareholders, the same rules apply. The dividends must be paid out of post-tax profits, and the recipients are responsible for reporting and paying any tax due based on their personal income level.

To be valid, the family member must:

• Own shares in the company

• Receive dividends in line with their shareholding

• Be included in dividend board minutes and receive a dividend voucher

Dividends cannot be paid to someone who is not a shareholder, and HMRC may challenge payments that appear to be disguised remuneration.

Salary vs Dividends: Tax Planning Considerations

While dividends are not tax deductible for companies, they can still be a tax-efficient way to extract profits when combined with a modest salary.

For example:

• A director takes a salary of £12,570 (within the personal allowance)

• No Income Tax or National Insurance is due on this amount

• Dividends are then taken on top, using the £500 dividend allowance and lower dividend tax rates

This strategy results in lower overall tax and National Insurance compared to taking a higher salary. However, because dividends are paid from post-tax profits, they do not reduce the company’s Corporation Tax liability.

The ideal balance between salary and dividends will depend on the director’s total income, other allowances and company profitability. It is important to factor in:

• Pensions

• Student loan repayments

• Employment allowance (for NICs)

• Personal circumstances such as Child Benefit or high-income tapering

Professional advice is recommended to structure your income tax efficiently and avoid triggering unexpected tax liabilities.

Conclusion

Dividends are not tax deductible in the UK. They are distributions made from post-tax profits and do not reduce a company’s Corporation Tax bill. While dividends are a useful tool for directors and shareholders looking to extract profits, they must be paid in line with company law and correctly reported on personal tax returns.

Understanding the difference between deductible business expenses and post-tax distributions is key to managing your company’s finances effectively. Dividends remain a valuable part of tax planning but must be used correctly to avoid compliance issues and maximise efficiency.

Whether you are running a small limited company or planning your income strategy for the year ahead, knowing how dividends are treated will help you make informed, tax-smart decisions.