Thinking about taking some money out of your limited company? Before you hit ‘transfer’, it’s worth understanding how dividends actually work — and what to check before you pay yourself.
Dividends can be a brilliant, tax-efficient way to pay yourself as a business owner, but they come with a few rules and responsibilities. Let’s break it down.
Who can receive dividends?
Dividends aren’t just for directors — they’re paid to shareholders based on the number and type of shares they hold.
So, if your company has two shareholders holding equal ordinary shares, they’ll normally receive the same amount. But if you’ve set up different share classes (like A and B shares), you can decide which class gets a dividend — handy if you want flexible profit distributions between, say, business partners or family members.
The key thing to remember? If someone isn’t a shareholder, they’re not entitled to a dividend, even if they’re a director.
If you want more flexibility over who receives dividends and when, take a look at our guide on Alphabet Shares — they’re a brilliant way to tailor profit distribution in your company.
Check if you actually have profits available
You can only pay dividends from retained profits — that’s the money left over after your company has paid all its expenses and Corporation Tax.
Just because you have cash in the bank doesn’t mean you can pay a dividend. For example, if your company owes VAT, PAYE, or has unpaid bills, that money isn’t truly “available” for dividends yet.
The best place to check this is your Xero balance sheet, but only if your bookkeeping is accurate and up to date. A few mispostings — like accidentally coding personal expenses to the company, or missing year-end adjustments — can make your profit figures look misleading.
That’s why at DNA Accountants, we always recommend letting us check your figures before declaring a dividend. We’ll make sure your books reflect your true position and help you avoid paying out money that doesn’t really exist!
Want to make sure your bookkeeping is solid before declaring a dividend? Our guide on double-entry bookkeeping with Xero shows what to watch out for and why the details matter.
Don’t forget Corporation Tax (and check your figures carefully!)
Before any dividends are paid, your company must first pay Corporation Tax on its profits. Dividends can only be taken from what’s left after that.
Example: If your company makes £50,000 in profit and owes £9,500 in Corporation Tax, your available dividend pot is £40,500.
You’ll only see the final Corporation Tax figure in Xero once your accounts are finalised. However, at DNA, we can add an estimated Corporation Tax figure throughout the year, so you’ve got a realistic idea of what’s available and can budget sensibly. It’s a simple step that makes a big difference when planning your cash flow and future dividends.
Get the paperwork right
Even if you’re the only director and shareholder, you still need proper paperwork for every dividend you pay:
- Board minutes to declare the dividend
- Dividend vouchers showing the amount per share and who’s receiving it
This paperwork is your evidence for HMRC that the payment is a genuine dividend — not a disguised salary. Skipping it might seem harmless, but it can cause big headaches later if your accounts are reviewed.
At DNA Accountants, we do this paperwork for our clients as part of our Company Secretarial package.
How dividends are taxed personally
Dividends aren’t put through PAYE — they’re taxed through Self Assessment, and you’ll need to include them on your personal tax return.
You get a £500 tax-free dividend allowance each year, and after that, the rates are:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
Dividends are added on top of your salary to work out which tax band you fall into.
Important: Your Self Assessment bill must be paid personally, not from the company account — it’s your personal liability. Make sure you set aside a portion of your dividends (around 20–30%) throughout the year so the tax bill in January doesn’t come as a shock.
Want to understand exactly how your dividends are taxed and what you’ll pay at different income levels? Check out our Dividend Tax Explained guide for a full breakdown.
Balancing salary and dividends
Many business owners choose to take a small salary (usually up to the National Insurance threshold) and then top it up with dividends. It’s often the most tax-efficient way to get paid — but it’s not one-size-fits-all.
Your income mix should be reviewed regularly, especially if profits change or you’re moving into a higher tax bracket. This is another area where a quick chat with DNA can save you money and stress.
Not sure whether you should be paying yourself a salary, dividends, or a mix of both? Our post on Salary vs Dividends (and Directors’ Loans) walks you through the pros, cons, and how to find the perfect balance.
Common mistakes to avoid
- Paying dividends without checking available profits
- Missing or incomplete dividend paperwork
- Paying dividends to directors who don’t own shares
- Forgetting that Self Assessment tax must be paid personally
- Not setting aside enough for personal or Corporation Tax
- Relying on inaccurate bookkeeping to decide dividend amounts
Final thoughts
Taking dividends is a great way to reward yourself for your hard work — but it’s not as simple as just moving money around. Understanding who’s entitled, how much you can take, and how it affects your taxes keeps your business healthy and HMRC happy.
At DNA Accountants, we can help you:
- Check your retained profits are accurate
- Estimate your Corporation Tax early
- Plan dividend payments throughout the year
- Stay ahead of personal tax deadlines
So you can take your dividends confidently — without any surprises later.