What a dividend is
A dividend is a payment a company can make to its shareholders if it has made a profit (GOV.UK: taking money out of a limited company). If you run your own company, you're often both a director and a shareholder. As a director you decide on the dividend. As a shareholder you receive it.
A dividend isn't salary, and it isn't a business expense. The company pays it out of profit that has already had Corporation Tax worked out on it, and it can't deduct the dividend when working out its Corporation Tax.
The retained profit rule
A company may only pay dividends out of "profits available for the purpose". That means its accumulated, realised profits, less its accumulated, realised losses, so far as they haven't already been paid out or used (Companies Act 2006, section 830). GOV.UK puts it simply: don't pay out more in dividends than the available profits from the current and previous financial years.
In practice, that's roughly the profit after tax the company has kept over the years (its retained profit or "reserves"), less dividends already paid.
An example
Bright Studio Ltd has kept £30,000 of profit after tax from earlier years. It has already paid £18,000 of that out in dividends. So far this year it has made £8,000 of profit, and it sets aside £1,500 for the Corporation Tax it expects to owe on that (just an example figure).
Profits available: £30,000 − £18,000 + £8,000 − £1,500 = £18,500. A dividend above that would be unlawful. If this year had been a loss instead, the loss would come off what's left from earlier years.
Which figures to use
The test is made by reference to the company's accounts: usually the last annual accounts, or interim accounts if those don't show enough (section 836). HMRC's manual says a private company has no set rules for interim accounts, but needs enough information to judge its distributable profits reasonably (CTM15205). So bring your books up to date before you decide.
How to pay a dividend, step by step
- Check the profits. Bring your bookkeeping up to date and work out the profits available, as above. Leave room for Corporation Tax.
- Hold a directors' meeting. GOV.UK says to hold a directors' meeting to declare the dividend and keep minutes of it, even if you're the only director. The minutes should record the amount per share, the date, and that the directors checked there were enough profits.
- Write a dividend voucher for each shareholder. GOV.UK says each voucher must show the date, the company name, the names of the shareholders being paid, and the amount of the dividend. Give a copy to each shareholder and keep a copy for the company's records.
- Pay it. Pay from the company bank account to each shareholder. Under the model articles, payment can be by bank transfer, cheque, or another way the directors agree with the shareholder (model articles, article 31).
- Record it in the books. The dividend reduces retained profit. It doesn't go in the profit and loss account as a cost.
Our free dividend voucher maker writes a voucher for each shareholder and the matching board minute, ready to save as a PDF.
Interim and final dividends
Here's how it works under the model articles for private companies limited by shares (article 30):
- Interim dividends are decided by the directors.
- Final dividends are declared by the shareholders by ordinary resolution. The directors must recommend the amount first, and the shareholders can't declare more than that.
The timing differs too. HMRC's manual says an interim dividend can be changed or cancelled until it's paid, so it counts as paid when the money is actually paid or put at the shareholder's disposal. A final dividend becomes a debt the company owes once it's declared, or on the payment date the resolution sets (CTM15205). That can decide which accounting period or tax year a dividend falls in, so get the dates right on the minutes and vouchers.
Your company's own articles of association set the rules, so check them if they're not the model ones.
Who gets what
GOV.UK says you usually must pay dividends to all shareholders. Under the model articles, a dividend must follow each shareholder's rights, and is paid according to how many shares each one holds on the date of the resolution or decision (article 30).
So if you own 60 shares and your partner owns 40, a £1,000 dividend on those 100 shares is £600 and £400. So shareholders with the same class of shares get the same amount per share. If your company has more than one class of shares (for example A and B shares), each class's rights decide what it can get. Ask an accountant or solicitor before setting that up.
Tax on dividends
- The company doesn't pay tax on the dividends it pays out, and can't deduct them for Corporation Tax (GOV.UK).
- Shareholders may pay Income Tax on dividends. For the 2026 to 2027 tax year (6 April 2026 to 5 April 2027), GOV.UK gives a dividend allowance of £500, and these rates on dividends above it: 10.75% for basic rate taxpayers, 35.75% for higher rate and 39.35% for additional rate. Your other income decides your band. Rates change, so check tax on dividends on GOV.UK.
- No tax credit. The dividend tax credit was replaced by the dividend allowance from April 2016 (GOV.UK factsheet). A voucher for a dividend paid now shouldn't show one.
The right mix of salary and dividends depends on your whole situation, so this guide doesn't try to give one answer. An accountant can work it out for you.
What goes wrong
Paying more than the profits
A dividend paid without enough profits is unlawful. A shareholder who knew, or had reasonable grounds to believe, it was unlawful must repay it to the company (Companies Act 2006, section 847). For a close company, HMRC's manual says the company is then treated as having made a loan to the shareholder, which can bring an s455 tax charge (CTM15205).
Taking money first and calling it a dividend later
Money you take from the company that isn't salary, a dividend or a repayment of expenses goes on your director's loan account (GOV.UK: directors' loans). Regular transfers to yourself with no board minutes and no vouchers aren't dividends. If the account ends up overdrawn, s455 tax can follow. A properly declared dividend can clear it, but only if there are enough profits.
No paperwork
Without minutes and vouchers, it's hard to show a payment was a dividend at all. Write them at the time, not at year end.
Paying the wrong people or the wrong amounts
Paying one shareholder and not another on the same class of shares, or not in line with their shareholdings, goes against the articles. Check your share register before every dividend.
Keeping your books in Munshian Ledger? Munshian Ledger checks the profits available before you declare a dividend, writes the board minutes and a voucher for each shareholder, keeps your share register, and can pay the dividend into a director's loan account. It's free.
This guide gives general information based on GOV.UK guidance, HMRC's manuals and UK legislation, checked on 10 November 2026. It isn't legal or tax advice for your situation. Rules and rates change, so check GOV.UK or speak to an accountant.