How to pay dividends from a UK Ltd company
The paperwork (voucher + minute), the tax rates (8.75%/33.75%/39.35%), the timing, and the mistakes that cost you the legitimacy.
Dividends are the standard tax-efficient way founders extract profit from a UK Ltd company. To be valid, they require (1) sufficient distributable profits, (2) a board minute, (3) a dividend voucher to each shareholder, (4) the right tax rate applied (8.75% basic, 33.75% higher, 39.35% additional). Done wrong, HMRC treats them as salary or director's loan — both worse.
What is a dividend?
A dividend is a payment to shareholders out of distributable profits — the company's accumulated post-corporation-tax profits, less anything already paid out. You can't pay a dividend if the company has retained losses on the balance sheet that exceed current-year profits.
Dividends are taxed in the hands of the shareholder, not as salary. They sit outside of PAYE and NIC, which is why they're tax-efficient — and which is why HMRC scrutinises them.
The three rules HMRC wants to see
1. Sufficient distributable profits
Before declaring, you (the director) must check the company has enough retained profit to cover the dividend. The number you care about is on the balance sheet:
Retained Earnings (after corporation tax) − Dividends already declared this year = Distributable profit available
If you declare a dividend that exceeds distributable profits, it's an "unlawful dividend" — HMRC and Companies House can recover it from you personally.
2. A board minute
Even a one-person company must write a minute. It records:
- That the board met (date + place)
- That distributable profits were checked and confirmed
- That a dividend of £X was declared
- The shareholder names + amounts
- The payment date
Sounds bureaucratic; it's the cheap insurance against HMRC reclassifying the payment as something else.
3. A dividend voucher per shareholder
Each shareholder needs a voucher showing:
- Company name + company number
- Shareholder name
- Dividend per share + total amount
- Date declared
- Date paid
The voucher is what the shareholder reports on their self-assessment. Keep a copy in company records and send one to each shareholder.
Tax rates (2025/26)
Dividends have their own tax bands, separate from income tax but stacked on top:
| Band | Threshold | Rate |
|---|---|---|
| Dividend allowance | First £500/year | 0% |
| Basic rate band | Up to total income £50,270 | 8.75% |
| Higher rate band | £50,271 - £125,140 | 33.75% |
| Additional rate | Above £125,140 | 39.35% |
Dividends are taxed in the year they're declared, not paid. So if you declare £30,000 of dividends in March 2026, they're taxed in 2025/26 even if you physically transferred the money in April.
The classic salary-plus-dividends pattern
Most UK founder-directors structure their pay like this:
- Salary at the personal allowance (~£12,570/year). Triggers NIC credit toward state pension. Mostly tax-free.
- Dividends for the rest, up to the basic-rate threshold.
This used to save thousands per year vs pure salary. Post-2025/26 NIC changes (employer rate up to 15%) make pure dividends slightly less attractive but still typically preferable.
How to actually do it
- Check distributable profits — does the company have enough retained earnings?
- Hold a board meeting (or a written resolution if sole director). Date it.
- Write the minute. Save in company records.
- Produce a dividend voucher for each shareholder.
- Transfer the money from company bank to shareholder bank.
- Post the JE: Dr Retained Earnings (Equity), Cr Bank.
- Shareholders report it on their next self-assessment.
Mistakes that cost you the legitimacy
- Transferring first, paperwork later. If HMRC audits and finds no contemporaneous minute, they may reclassify as salary (full PAYE + NIC + employer NIC = ~50% effective tax instead of 8.75%).
- Declaring a dividend when profits aren't there. Unlawful dividend; HMRC can require repayment + treat as loan + s455 charge.
- Paying dividends that don't match shareholdings. If two shareholders own 50% each, you can't pay one of them more without alphabet-share-class restructuring. HMRC settles this stuff.
- Forgetting the voucher. Then the shareholder has nothing to report on self-assessment, and HMRC has nothing to cross-check. Smells bad.