Limited Company Dividends
Part of running your Limited Company in a tax-efficient way that maximises your overall take-home pay is by understanding the role dividends play. Whilst we always advise our clients to discuss their accounts with their Client Director for tailored advice, understanding how dividends work can help you make smarter decisions for you both personally and professionally.
In this blog we’ll take a closer look at what dividends actually are, how they’re paid, and what you need to know about them as a UK Limited Company owner.
What is a dividend?
A dividend is the distribution of a company’s profits amongst its shareholders. If you’re a Limited Company owner you’re able to pay yourself a salary and then supplement your income with the use of dividends.
The way in which dividends are taxed is different to how a salary is taxed, and for many Limited Company directors they will add their spouse / civil partner as a shareholder for them to draw more tax-free income from the company overall.
When can you draw dividends?
You can draw dividends from your Limited Company whenever you like, so long as there are sufficient profits within the company. If you draw dividends without sufficient profit this would be considered an illegal dividend or director’s loan, which could potentially lead to an investigation by HMRC.
For most Limited Company directors, they draw dividends on a monthly, quarterly or annually basis, although it’s completely up to the director as to how often they do this. Whenever you do decide to draw dividends, just ensure you keep the correct records, to ensure that HMRC can’t class them as a ‘disguised salary’ should they decide to investigate it.
You must ensure that you document the drawing of dividends through taking minutes, and you must also provide all shareholders with a dividend voucher (if you’re using FreeAgent it can create a dividend voucher automatically for you). By doing so you’re creating a clear audit trail, which is useful to have in the case of an HMRC investigation. Additionally, all dividend vouchers are required for your annual tax return.
What are the National Insurance Contributions (NICs) and tax implications?
Dividends don’t incur NICs, and therefore due to lower tax rates and not being subject to NI, dividends are able to yield a better net take home if withdrawn in an efficient way.
The dividends you receive are taxed as personal income, and there’s a tax-free allowance of up to £500 per person. The tax thresholds for the current tax year 2025/26 for dividends are as follows:
– Basic rate (taxed at 8.75%): up to £50,270
– Higher rate (taxed at 33.75%): from £50,271 to £125,140
– Additional rate (taxed at 39.35%): over £125,140
Dividends are taxed at the point of declaration, and not when they’re drawn, so timing your declarations is important. For example, if you were to declare a dividend on April 1st, 2025, but it’s not paid until April 7th, it will be included in your 2024/25 tax return. Depending on your previous withdrawals during that current tax year, this may push you into a higher tax rate.
Your Client Director can guide you through this, and help you stay on track of the applicable tax rate, assess whether it’s worth drawing dividends, and determine the best timings for doing so.
Final thoughts from Aardvark
It’s important to note that when declaring dividends, you’ll be paying them at gross to the shareholders. This means that any tax liability must be set aside personally to be paid via your self-assessment tax return. Any dividends declared in a given tax year will be payable by the following 31st January at which that tax year ends. For example, if you declared your dividends in 24/25, the tax would be payable by 31st January 2026.
If this is your first self-assessment tax return and your liability is over £1,000 it’s likely that your payments on account will trigger. If you’re unsure about this, please speak to your Client Director who will be able to provide you with more information.
Dividends are deemed as taxable income and can be included in total taxable pay for references and mortgages, depending on the provider you choose to go with.
Every person and their circumstances are different, and therefore your situation will determine when and how you choose to draw dividends. Always speak to your Client Director before withdrawing any dividends form your Limited Company to ensure you’re taking the correct amount and following all the regulations and guidelines set out by HMRC.
If you’re on the lookout for a new accountant, speak to our team here at Aardvark Accounting today.
Note: All the information and advice in this blog post was correct at the time of writing.
