Understanding Dividends: A Guide for Company Directors
If you're a director of a limited company, taking income in the form of dividends can be a tax-efficient strategy. But there are rules and best practices you must follow. Here's a comprehensive guide:
What Are Dividends? Dividends are payments made to shareholders from the post-tax profits of a company. They’re distributed after all expenses, taxes, and other obligations have been covered.
When Can You Take Dividends? Dividends can only be taken if your company has sufficient retained earnings or current profits. You must:
Hold a board meeting to declare the dividend.
Record the meeting in minutes.
Issue a dividend voucher to each shareholder, detailing the amount and tax credit.
How Are Dividends Taxed? As of 2025, the dividend allowance is £500. After that, dividends are taxed at the following rates (subject to income thresholds):
Basic rate: 8.75%
Higher rate: 33.75%
Additional rate: 39.35%
Salary vs. Dividends A mix of salary and dividends is often the most tax-efficient way for directors to receive income. Salaries are subject to PAYE and National Insurance, while dividends are not.
Compliance and Timing Always ensure accurate bookkeeping and avoid taking dividends if your company is not in profit — this could be considered illegal. Regular reviews with your accountant can help manage dividend distributions correctly.