How do dividends work? | Informi (2024)

A dividend is a payment of profit from a limited company to its shareholders. Dividends cannot be counted as business costs when working out Corporation Tax. You must also not pay more dividends than available profits from the current and previous financial years. This is the money the company has remaining after paying all business expenses and liabilities, plus any outstanding taxes (such as Corporation Tax and VAT). This ‘retained profit’ may have been accumulated over a period of timeand any excess profits not distributed as dividends simply remain in the company’s bank account.

If you run a small business operating as a limited company, there may be benefits to paying yourself a dividends in addition to a salary.

There are no rules about how frequently dividends can be paid, but most businesses distribute them quarterly or every six monthsafter working out how much the company can afford to pay.

Think carefully about when to pay dividends from your limited company, because it might affect both the amount of tax you pay and when you need to pay that tax to HMRC.

1. The timing of a dividend can affect the amount of tax you pay.

If your business profits are volatile from year to another, you can use dividends to create a more even income pattern and avoid paying higher rate tax. For example, if your business has profits of £50,000 in year 1 and £10,000 in year 2, you could declare a dividend of £30,000 in each year to make sure that you remain a basic rate taxpayer in each year.

2. The timing of a dividend can affect when you need to pay tax to HMRC.

Tax on dividends is usually due in the January after the end of the tax year in which the dividend was paid. So, tax on a dividend received in late March 2023 will be due in January 2024, but tax on a dividend received in late April 2023 won’t be due until January 2025.

You won’t pay tax on the first £500 of dividends that you get in the tax year.

Above this allowance, the tax you pay depends on which Income Tax bandyou’re in.

For the 2024/25 tax year, the tax payable on dividends is as follows:

Add your income from dividends to your othertaxable incomewhen working this out. You may pay tax at more than one rate.

Please note that the results you see on your screen are estimates only.

Taxes don't have to be taxing

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You’ll need to produce two documents every time your company pays a dividend to its shareholders.

Board meeting minutes: To comply with the law, all companies must hold a board meeting to agree the dividend declaration, and must record the meeting minutes in the company’s records. For small companies, this is often little more than a paperwork exercise.

Dividend voucher: You must provide each shareholder with a dividend voucher. An electronic version is fine, if previously agreed by shareholders, or the company should send out a paper version in the post to each shareholders.

The voucher should include:

• the company name
• the name and address of the recipient
• the date of the dividend payment
• the total number of shares owned by the shareholder
• the net dividend to be paid
• the amount of the dividend tax credit (see next section)
• and a director’s signature.

You must ensure you maintain the correct paperwork, including minutes of board meetings. These mayneed to be produced if you are ever selected for an HMRC investigation.

According to many accountants,there’s a risk that you can fall foul of HM Revenue and Customs (HMRC) rules if you pay dividends without following a formal process or maintaining suitable records. If you’re unable to prove that money paid to you from your business is a dividend, HMRC may argue that it should be treated as a salary payment, and taxed accordingly.

Find out more about tax changes to dividend rates for the current tax year.