Dividends are one of the most common ways for shareholders in owner-managed businesses to extract profits from a company. However, dividends must be declared correctly to comply with company law and tax regulations.
A dividend represents a distribution of profits to shareholders. Unlike salaries, dividends are paid from profits after Corporation Tax has been deducted. This means the company must have sufficient retained profits available before declaring a dividend.
Before issuing a dividend, directors should review the company’s financial position to ensure that adequate distributable reserves exist. Paying dividends when a company does not have sufficient profits may lead to the payment being treated as an illegal dividend, which could require repayment.
Proper documentation is essential when declaring dividends. Companies should prepare:
- Board meeting minutes approving the dividend
- Dividend vouchers for each shareholder
- Updated accounting records showing the distribution
Dividend vouchers should include key details such as the company name, dividend amount, date of payment, and shareholder information.
From a tax perspective, dividends are taxed differently from employment income. For the 2025/26 tax year, individuals receive a £500 dividend allowance, after which dividends are taxed according to the taxpayer’s marginal rate.
Because dividends are not subject to National Insurance contributions, they are often more tax efficient than salary payments for company directors.
However, dividend planning should always be coordinated with other aspects of financial planning, including salary levels, pension contributions, and overall business profitability.
Working with an accountant ensures that dividends are declared correctly and that directors maintain a tax-efficient remuneration strategy.