Dividends: what you need to know (the good, bad and ugly)

As a typical director and shareholder of a limited company, taking dividends as a partof renumeration can be a tax-efficient way to reward yourself. However, there are important rules, risks, and planning considerations to be aware ofbefore you do.

What Are Dividends?

Dividends are payments made to shareholders from a company’s post-tax profits.

Unlike salaries, dividends are not subject to National Insurance Contributions (NICs) and are taxed at lower rates which makes them attractive – but only if taken correctly!

Can Your Company Pay Dividends?

Yes of course, but………

Before any dividends can be declared, your company must:

• Ensure all income and expenses are accurate and up to date
• Have sufficient retained profits in the business (after Corporation Tax)
• Keep proper records, which includes:
– Board meeting minutes declaring the dividend.
– Dividend vouchers for each shareholder.

What are the Dividend Tax Rates for 2025/26

There is a tax-free dividend allowance however this has been reduced in recent years and is now only £500.

Anything above this amount in dividends per annum is taxed at
• 8.75% – Basic rate tax
• 33.75% – Higher rate tax
• 39.35% – Additional rate tax

Your total income (salary + dividends) determines which tax rate band you fall into.[For example, if you take a salary of £12,570 (your personal allowance), you cantake up to £37,700 in dividends and stay within the basic rate band.]

What are the Steps Involved in Taking Dividends?

1. Pay your Salary First (The net amount per your payslip)
   
2. Profit Availability
   • Dividends must come from real profits—not just cash in the bank.
   • Always check your company’s reserves position (in your Balance sheet!) and factor in any likely Corporation Tax too!
   
3. Documentation
   • You must have formal documentation in place
   • Hold a board meeting (even if you’re the sole director).
   • Record the decision in a minute of the meeting
   • Issue dividend vouchers to each Shareholders who is receiving dividends
   
4. Timing
   Dividends can be paid at any time, as long as they are properly declared.
   
5. Tax Planning
   Dividends form a part of your overall renumeration, so
   • Be aware of spreading dividends across tax years (simple or not so simple tax planning is sensible)
   • Consider the use of your personal allowance and dividend allowance.
   • Consider whether having a spouse also obtaining dividends to maximise allowances
   NOTE: They will also be a shareholder and a decision maker in practise!)

Common Pitfalls to Avoid

• Multiple Shareholders equals multiple Decision Makers
• Paying dividends without sufficient profits or reserves – leads to legal and tax issues.
• Poor record-keeping – HMRC may reclassify unclear dividend payments as salary or directors’ loans.
• Ignoring other income sources – rental income or pensions can push you into higher tax bands.
• Non-Tax Issues – Be aware of obtaining a mortgage or practical life issues e.g. (as dividends are not treated the same as a salary)

How Sakura Supports You

At Sakura, we help clients:
• Review company profits and reserves.
• Advise on resolving Over drawn Directors Loan accounts
• Flag Up Potential Large Tax Bills at Year End – (Variable Income) from Year to Year
• Improve Bookkeeping – Better clarity on available Profits
• Discuss and plan salary and dividends tax-efficiently.
• Prepare dividend documentation accurately.
• Stay compliant with HMRC and Companies House rules.

Whether you’re planning a regular dividend strategy or a one-off payment, we’ll ensure it’s done properly.

At Sakura, we’re here to help you navigate these decisions with confidence and compliance.

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