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Dividends are a type of payment that limited companies can make to shareholders from their profits. They can be a useful way to reward investment or performance, but the tax rules for dividends are different to other types of income.

Can any business pay dividends?

Who can receive dividends?

How much can a company pay in dividends?

Can directors still take a salary if they receive dividends?

What are the tax implications of taking a dividend?

Most business owners pay themselves from the profits that they make, but because limited companies are a separate legal entity to the people that own them, the process is more formal – hence dividend payments.

There are pros and cons to every business structure depending on your circumstances, but lots of people choose to operate a limited company because this allows them to take part of their income as dividends, which can sometimes be more tax efficient.

Companies can make dividend payments to their registered shareholders according to the proportion and type of shares they hold. In some businesses the shareholders are also directors in the company, but not always.

What is the difference between shareholders and directors?

Shareholders own the company by having shares in it. They are often known as ‘members’. Directors manage the business and the way it operates, and tend to be much more hands-on. In some smaller businesses there might be just one person who is both the only shareholder and sole director.

Learn more about the Difference Between A Shareholder and a Director in our guide.

In theory there aren’t any limits on declaring dividends if the company has profits available to pay them after paying its tax bill and any other liabilities. In practice, it’s normally a very good idea to leave something in the business to fund future growth and help manage cash flow!

Because profits can fluctuate depending on what sort of year the business has had, the amount available for dividends can also vary. The amount that a shareholder receives as a dividend also depends on how many shares they own, and what sort of shares they are. Some companies create different types of shares so they can be more flexible with what shareholders are entitled to.

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Yes absolutely! Lots of company directors who are also shareholders take both a salary and dividends because it can be a more tax efficient way to pay themselves from the business. It can be a bit complicated, so we have a separate article which explains director’s salaries in more detail.

Dividends aren’t taxed at source in the same way that salaries are, so you’ll need to submit a Self Assessment tax return to make sure you pay the right amount of tax on any dividends you receive.

Find out more about dividend tax rates and allowances in our step-by-step guide.

In the 2023/24 tax year the Dividend Allowance is £1,000, which means you won’t pay dividend tax on the first £1,000 of dividends that you receive in a year. You can use the allowance on top of your Personal Allowance too!

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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