When you operate your own limited company, there are two main ways you can extract profit – in the form of salary or dividends. Taking dividends is a popular way of doing so because this is usually more tax-efficient than taking everything as salary.
Want to learn more about dividends? We explore what they are, the dividend tax rate, and much more.
What are dividends and how do they work?
Dividends are payments made to a company’s shareholder(s). They are a distribution of retained profits, i.e. after the deduction of business expenses, Corporation Tax, etc.
Dividends are received gross and are subject to Income Tax. Each year you get a tax-free dividend allowance over and above your personal allowance. Beyond this, dividends are taxed at different percentages in the basic, higher and additional rate tax bands. The dividend tax rates are distinct from the main rates of Income Tax.
For 2026/27 the rates are as follows:
- Dividend Allowance – £500
- Basic Rate Tax Band – 10.75%
- Higher Rate Tax Band – 35.75%
- Additional Rate Tax Band – 39.35%
Dividend income is not subject to National Insurance.
Most shareholders receiving dividends from Personal Service Companies (PSCs) will report their dividend income and pay the Income Tax these on their self-assessment tax return.
Commonly, limited company shareholders receive a salary from the company, with the remainder of their income taken as a dividend.
How do I take dividends out of my company?
The first step you will need to take is to hold a meeting with your company shareholders to vote on and ‘declare’ a dividend payment. A record of this meeting should be held along with minutes from the meeting, even if you are the sole shareholder of your company. This record should include the date and amount to be issued, the shareholder(s) present, and whether any other business was discussed.
A dividend voucher must also be presented to each shareholder, which should include the following:
- Your limited company name
- The name and address of the shareholder
- Total number or percentage of shares owned by the shareholder
- Dividend amount paid
- Date
- Signature of the company director
Most cloud based bookkeeping platforms will automatically prepare dividend minutes and vouchers when these are declared in the software.
If there are two or more shareholders, dividends should be distributed to shareholders according to the number and class of shares they own.
Dividends can be paid at any time, providing there are available profits. It’s entirely up to you when and how much you pay, provided sufficient profits are available.
Do I need to be outside IR35 to draw dividends?
If you are operating inside IR35 then all your turnover will be treated as a deemed salary and as such you would not be generating the profit necessary to declare dividends.
That said, if you have retained profit brought forward, this can potentially be declared as dividends. As dividends are the last type of income subject to Income Tax however, if you are in receipt of inside IR35 salaries, then it is not likely to be tax efficient to do so if the salaries exceed the basic rate tax band.
Salary or dividends: how should I pay myself?
One of the key advantages of operating through a limited company (outside IR35) is that you can structure how profits are extracted from the company and indeed whether to extract the profits or leave these to accumulate.
Commonly, the most efficient way to do so is to take a salary to the personal allowance and to declare dividends beyond this to maximise the use of your basic rate tax band, although this will vary depending on your circumstances and whether you have other sources of income beyond your company.