How to Pay Yourself Dividends from a Limited Company

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We created this webpage for people running a company who want clear answers on tax, payroll, Companies House duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

Paying yourself dividends is one of the main reasons many people choose to run a limited company. When done correctly dividends can be a tax efficient way to extract profits and reward yourself for the success of the business. When done badly they can create serious legal and tax problems that often surface months or even years later.

In my experience dividends are widely misunderstood. Many directors assume dividends are simply money taken out of the business when there is cash in the bank. Others believe dividends can be backdated or used to fix problems after the year end. Neither of these assumptions is correct.

In this article I want to explain clearly how dividends work in a UK limited company, when you can pay them, how to calculate them properly, what paperwork is required, how they are taxed, and the common mistakes I see time and again. Everything here is grounded in UK practice and reflects how HMRC and Companies House expect dividends to be handled.

By the end you should feel confident about paying dividends correctly and understanding how they fit into your wider tax planning.

What dividends actually are

A dividend is a distribution of company profits to shareholders. It is not a salary and it is not an expense of the business. Dividends are paid out of profits after Corporation Tax.

This distinction is critical.

Dividends

• Are paid to shareholders not directors
• Come from profits not turnover
• Are not subject to PAYE or National Insurance
• Must be properly declared and documented

You can be a director without receiving dividends and you can receive dividends without being a director. The key link is share ownership.

Who can receive dividends

Only shareholders can receive dividends. If you own shares in the company you are entitled to dividends in proportion to your shareholding unless different classes of shares exist.

This means

• A non working shareholder can receive dividends
• A working director with no shares cannot
• Dividends are not linked to hours worked

This often surprises people who assume dividends are simply another form of pay.

The importance of distributable profits

Dividends can only be paid from distributable profits. This means profits that remain after accounting for all expenses and Corporation Tax.

Distributable profits are calculated by

• Starting with retained profits
• Adding current year profits
• Deducting Corporation Tax
• Adjusting for any brought forward losses

Cash in the bank is irrelevant. You can have cash and no distributable profits or profits and no cash.

Paying dividends without sufficient distributable profits creates illegal dividends which must be repaid or reclassified.

How to check if you have profits available

Before paying dividends you should check whether profits are available at that point in time.

This usually involves

• Reviewing the last set of accounts
• Preparing up to date management accounts
• Estimating Corporation Tax
• Confirming retained profit levels

For small companies this is often overlooked which is where problems start.

Interim dividends versus final dividends

Most owner managed companies pay interim dividends.

Interim dividends

• Are declared by the directors
• Can be paid at any point during the year
• Are based on profits available at that time

Final dividends

• Are usually declared after year end
• Are approved by shareholders
• Are less common in small companies

In practice interim dividends are more flexible and better suited to regular drawings.

The process of paying a dividend

Paying a dividend is a formal process even in a one person company.

The correct steps are

• Confirm distributable profits exist
• Hold a board meeting or make a written decision
• Declare the dividend
• Prepare dividend vouchers
• Pay the dividend

Skipping steps does not make the dividend valid even if the money is transferred.

Board minutes and decisions

Dividends must be formally declared. This is usually done through board minutes or a written resolution.

The minutes should record

• The date of the decision
• The amount of the dividend
• The shareholders receiving it
• The payment date

In a one director company this can still be done as a written record.

Dividend vouchers explained

A dividend voucher is a document given to the shareholder showing the details of the dividend.

It should include

• Company name and number
• Shareholder name
• Dividend amount
• Dividend date
• Type of dividend

Dividend vouchers are often requested during HMRC enquiries so they should be kept safely.

Paying the dividend

Once declared the dividend can be paid.

Payment is usually made

• From the company bank account
• To the shareholder personally
• On or shortly after the declared date

The payment date matters for personal tax purposes.

Timing of dividends and tax years

Dividends are taxed in the tax year they are paid not when they are declared.

This means

• A dividend paid on 5 April falls in one tax year
• A dividend paid on 6 April falls in the next

This timing can be used legitimately for tax planning but must be handled carefully.

How dividends are taxed personally

Dividends are taxed on the shareholder through Self Assessment.

The tax rates depend on

• Your total income
• Your tax band
• The dividend allowance

Dividends are not tax free beyond the allowance and they must be reported even if no tax is due.

Dividend allowance and tax bands

Each individual has a dividend allowance. Dividends within this allowance are taxed at 0 percent but still count towards income totals.

Dividends above the allowance are taxed at different rates depending on your tax band.

This interaction with salary and other income is why dividends should not be planned in isolation.

Dividends versus salary

Dividends are often used alongside a small salary.

Salary

• Is an expense of the company
• Reduces Corporation Tax
• Is subject to PAYE and National Insurance

Dividends

• Are paid from post tax profits
• Do not attract National Insurance
• Are taxed personally

The right balance depends on profit levels and personal circumstances.

Dividends and Director’s Loan Accounts

Dividends are often used to clear an overdrawn Director’s Loan Account.

This can work but only if

• Profits exist at the time of declaration
• The dividend is properly documented

Dividends cannot be backdated to fix loan account issues after the event.

Common dividend mistakes I see

Over the years the same errors appear repeatedly.

These include

• Paying dividends without checking profits
• Backdating dividends
• Missing dividend vouchers
• Treating cash withdrawals as dividends
• Forgetting to declare dividends properly
• Ignoring Corporation Tax

These mistakes often lead to unexpected tax bills and HMRC scrutiny.

What happens if dividends are paid illegally

If dividends are paid without sufficient profits they are illegal.

Consequences can include

• Dividends being reclassified as loans
• Director’s Loan Account issues
• Potential Section 455 tax
• Repayment of dividends
• HMRC enquiries

This is why checking profits matters even in small companies.

Dividends when there are multiple shareholders

Where there is more than one shareholder dividends must be handled carefully.

Key points include

• Dividends must be paid in line with shareholdings unless different share classes exist
• All shareholders must be treated fairly
• Proper documentation is essential

Alphabet shares are sometimes used to allow flexibility but they must be set up correctly.

Dividends and spouses or family members

Dividends are often paid to spouses or family members who hold shares.

This is allowed provided

• Shares genuinely exist
• Ownership is real not artificial
• Dividends reflect shareholdings

HMRC will challenge arrangements that lack commercial substance.

Record keeping for dividends

Dividend records must be kept for at least six years.

These include

• Board minutes or resolutions
• Dividend vouchers
• Evidence of payment
• Profit calculations

Good records make enquiries straightforward.

How HMRC view dividends

HMRC accept dividends as a legitimate form of remuneration when handled correctly.

They focus on

• Whether profits existed
• Whether paperwork is in order
• Whether payments align with share ownership
• Whether dividends are being misused

Clear records and correct process reduce risk significantly.

The role of an accountant in dividend planning

Dividends interact with Corporation Tax personal tax and cash flow. This is where advice adds real value.

An accountant will

• Calculate distributable profits
• Advise on timing
• Balance salary and dividends
• Ensure compliance with HM Revenue and Customs
• Help avoid costly mistakes

From experience dividend planning works best when it is reviewed regularly rather than once a year.

How often should dividends be reviewed

There is no fixed rule but many directors review dividends

• Quarterly
• After management accounts
• Before large withdrawals

Regular review prevents surprises.

Dividends in loss making periods

If the company is making losses dividends cannot usually be paid.

Past retained profits may still allow dividends but this must be checked carefully.

Assuming dividends are always available is a common mistake during quieter periods.

Final thoughts from experience

Dividends are a powerful and legitimate way to pay yourself from a limited company but only when handled properly.

They are not casual withdrawals and they are not a substitute for payroll. They require profit checks documentation and planning.

From experience the directors who struggle with dividends are not those trying to avoid tax but those who underestimate the formality involved. Once the process is understood dividends become straightforward and predictable.

If you are unsure whether dividends are right for your company or how much you can safely take the safest approach is to pause review the numbers and get advice before moving money. Fixing dividend problems after the event is always harder than getting it right at the start.

You may also find our guidance on director salary and how to pay yourself from a limited company helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.