You have probably heard the term dividends mentioned when people talk about running a limited company. But if you are new to company ownership or self-employment, it is not always obvious what dividends are, how they work, or why they matter from a tax point of view.
If you run a limited company in the UK, understanding how dividends are taxed can help you pay yourself in a sensible and tax-efficient way.
What are the dividends?
A dividend is a payment a limited company can make to its shareholders from profits after tax.
In simple terms, this means your company must first pay its business costs, settle any liabilities, and account for taxes such as Corporation Tax and VAT where relevant. Only then can any remaining profit be considered for distribution as dividends.
For the financial year beginning 1 April 2026, the main rates of Corporation Tax are 19%, 25%, or 25% with marginal relief, depending on the company’s profit position.
It is important to remember that:
- dividends are not a business expense for Corporation Tax purposes
- you cannot lawfully pay dividends unless the company has enough profit after tax to cover them
- paying dividends without sufficient retained profit can create legal and accounting problems
For many company directors, the most tax-efficient approach is often to take a small salary and then draw the rest of their income as dividends. That balance will depend on your wider income, profit levels, and personal circumstances.
How dividends work in practice
Dividends are paid to shareholders in line with the shares they hold in the company.
So, if a shareholder owns 50% of the ordinary shares, they would usually receive 50% of any dividend declared. If there is more than one shareholder, each person’s entitlement is normally based on their shareholding.
This is one of the reasons dividends are commonly used by owner-managed limited companies. They can be a practical way to extract profits once the company has met its obligations.
How does a company issue a dividend?
Before a dividend is paid, it must be declared properly.
This usually means holding a director’s meeting to approve the dividend. A formal record of that decision should be kept in the company’s records. Even if you are the only director, the paperwork still matters.
For each dividend payment, the company should produce a dividend voucher showing:
- the date the dividend is paid
- the company name
- the name of each shareholder receiving the dividend
- the amount being paid
A copy should be given to each shareholder receiving the payment, and another copy should be kept with the company’s records.
Good accounting software can make this process much easier, but the responsibility still sits with the company to ensure the dividend is declared correctly.
Do you pay tax on dividends?
The company itself does not pay tax on the dividend payment.
Instead, the individual shareholder may need to pay personal tax on the dividend income they receive. This is usually reported through their annual Self-Assessment tax return.
One of the main reasons dividends are popular with limited company directors is that they are not subject to National Insurance Contributions (NICs).
That can make a real difference when compared with salary. For the 2026/27 tax year, employee NICs are charged at:
- 8% on earnings between £12,570 and £50,270
- 2% on earnings above £50,270
Because of this, many directors choose a combination of low salary plus dividends as a more efficient way to take income from their company.
The UK dividend allowance for 2026/27
For the 2026/27 tax year, you can receive up to £500 in dividend income before paying dividend tax.
This is known as the Dividend Allowance.
It sits separately from your standard Personal Allowance, which is £12,570. So, depending on your circumstances, you may be able to receive both:
- £12,570 covered by your Personal Allowance
- £500 covered by the Dividend Allowance
Any dividend income above that point is taxed according to your Income Tax band.
Dividend tax rates and thresholds for 2026/27
Once your Personal Allowance and Dividend Allowance have been used, the rate of tax on further dividends depends on the Income Tax band you fall into.
For 2026/27, the dividend tax rates are:
- 10.75% for basic-rate taxpayers
- 35.75% for higher-rate taxpayers on total income over £50,270
- 39.35% for additional-rate taxpayers on total income over £125,140
These thresholds are currently frozen until at least April 2028.
If you are a Scottish taxpayer, your non-dividend income may be taxed using Scottish Income Tax bands, but dividend tax still follows the UK-wide dividend tax rates and thresholds.
Example: dividend tax for 2026/27
Here is a simple example using different figures to illustrate how the tax works.
Let’s say a company director takes:
- salary: £12,570 dividends: £52,000
That gives total income of £64,570.
How the tax is worked out
| Income | Type of income | Tax treatment | Tax due |
| First £12,570 | Salary | Covered by Personal Allowance | £0 |
| Next £500 | Dividends | Covered by Dividend Allowance | £0 |
| Next £37,200 | Dividends | Taxed at 10.75% | £3,999.00 |
| Remaining £14,300 | Dividends | Taxed at 35.75% | £5,112.25 |
Total income: £64,570
Total dividend tax due: £9,111.25
This example assumes the salary uses the full Personal Allowance and that there is no other taxable income to take into account.
What is the maximum you can take in salary and dividends without paying higher-rate tax?
If your aim is to stay within the basic-rate band for 2026/27, a common structure is:
- salary: £12,570
- dividends: £37,700
That gives total income of £50,270, which keeps you at the top of the basic-rate threshold.
In this situation:
- your salary of £12,570 is covered by your Personal Allowance
- the first £500 of dividends is covered by the Dividend Allowance
- the remaining £37,200 of dividends is taxed at 10.75%
That creates a total tax bill of £3,999, leaving take-home pay of £46,271.
This example assumes that this is your only income for the year. If you have other earnings, savings income, rental income or benefits, the position can change.
Planning ahead for future dividend tax
While the rates for 2026/27 are now in place, it is still worth planning ahead.
The government has already legislated for the Personal Allowance and the basic-rate limit to remain frozen until April 2028. In practice, that means more people can drift into paying higher rates of tax over time, even if their income only rises modestly.
After that freeze ends, tax thresholds are expected to increase in line with inflation, which may offer some relief. But until then, careful planning remains important for directors who rely on dividends as part of their annual income.
Making dividends work for you
Dividend planning is not just about knowing the headline rates. It is about looking at the full picture, including:
- company profits
- Corporation Tax
- salary levels
- dividend timing
- other personal income
- Self Assessment obligations
Getting that balance right can help you draw money from your company in a way that is both compliant and tax-efficient.
At Accounting People, we help limited company directors understand how to pay themselves properly, keep on top of dividend paperwork, and avoid unpleasant surprises at Self Assessment time. Whether you are newly incorporated or have been running your company for years, we can help you structure your income in a practical way.
We also support clients with:
- payroll and HMRC submissions
- dividend records and vouchers
- company tax compliance
- annual accounts
- Self Assessment tax returns
Need advice on salary and dividends?
If you want to understand the most tax-efficient way to pay yourself from your limited company, Accountingpeople.co.uk can help.
We give straightforward advice on salary and dividend planning, keep your records in order, and help make sure your tax position is handled properly from the start.
