How to Pay Yourself Dividends from a Limited Company

If you are a shareholder of a limited company, paying yourself through dividends can be one of the most tax-efficient ways to take income. Unlike salary, dividends are not subject to National Insurance, which can significantly reduce your overall tax bill. But there are rules and formalities to follow, and it is important to understand how the process works to stay compliant with HMRC.

This guide explains how to pay yourself dividends, when they are allowed, what paperwork is required, and how they are taxed in the UK.

What are dividends?

Dividends are payments made to shareholders from a company’s post-tax profits. In simple terms, this means you can only pay yourself dividends if your company has made a profit after paying Corporation Tax. You cannot declare a dividend if the company has no retained earnings, even if you have money in the bank.

As a director and shareholder, you are allowed to take both a salary and dividends. Most small business owners use a combination of both to keep their tax liabilities as low as possible.

When can you take dividends?

Dividends can be paid at any time, but only if the company has sufficient distributable profits. Before paying a dividend, you should check the latest management accounts or financial statements to confirm that funds are available.

It is not enough to have cash in the bank. If your company has made losses or has not yet paid its Corporation Tax bill, you may not legally be allowed to take a dividend. Paying dividends unlawfully can result in the money being treated as a director’s loan, which can trigger additional tax liabilities and penalties.

How to pay a dividend properly

Paying a dividend is not as simple as transferring money from your company bank account to your personal account. There is a legal process you must follow.

First, hold a directors’ meeting, even if you are the only director. You must formally declare the dividend, record the decision, and state the amount and date. Then, issue a dividend voucher to yourself. This document should include the company name, the shareholder’s name, the date, the amount paid, and the signature of a director.

Once this paperwork is in place, you can transfer the dividend from the company’s bank account to your personal account. Keep the voucher on file in case HMRC requests evidence in the future.

How dividends are taxed

Dividends are taxed differently from salary. You do not pay National Insurance on dividend income, but you will pay dividend tax based on your total income for the tax year.

For the 2024/25 tax year, the dividend tax rates are as follows:

• The first £500 of dividend income is tax-free under the dividend allowance

• Basic rate taxpayers pay 8.75 percent

• Higher rate taxpayers pay 33.75 percent

• Additional rate taxpayers pay 39.35 percent

Your dividend income is added to your other earnings to determine which tax band applies. You will need to report dividends on your Self Assessment tax return if your dividend income exceeds £10,000 or if you are already required to file a return.

A simple example

Let’s say your company has £20,000 in retained profits after Corporation Tax. You pay yourself a salary of £12,570 and decide to take £15,000 in dividends. The first £500 is tax-free. The remaining £14,500 is taxed at 8.75 percent if you are within the basic rate band. You report this on your Self Assessment return at the end of the tax year and pay the tax due by 31 January the following year.

Common mistakes to avoid

Do not take dividends if your company has not made enough profit after tax. HMRC may treat these payments as loans or disguised salary, which could lead to unexpected tax charges. You should also avoid mixing up salary and dividends. Salary must go through PAYE, and dividends must be properly declared with supporting paperwork.

It is also a mistake to rely on dividends as your only income if your profits are inconsistent. Since dividends depend on retained earnings, it is wise to have a mix of salary and dividends to maintain stable cash flow.

Final thoughts

Dividends can be a powerful way to draw income from your limited company, but they must be taken correctly. Always ensure there are sufficient profits available, follow the legal process, and keep proper records. Combined with a modest salary, dividends allow many company directors to manage their tax liabilities more efficiently.

If you are unsure about your company’s profit position or the best way to structure your income, speak to an accountant. A little planning can save you a lot in tax and help you stay compliant with both Companies House and HMRC.