How to Take Dividends from Your Limited Company: A Guide for Directors

Updated for the 2025/26 Tax Year

Dividends are one of the most tax-efficient ways to take money from your company, but they must be declared correctly to remain compliant with HMRC and company law. This guide explains how dividends work, the legal requirements, and when to seek professional advice.

What is a Dividend?

A dividend is a payment made to shareholders from a company’s distributable profits (retained earnings after tax). Unlike a salary, dividends are not subject to National Insurance but are subject to income tax.

Salary, Dividends, and Director’s Loan Accounts – Understanding the Differences

Many business owners take money from their company regularly without declaring whether it is salary, dividends, or a loan. Each method has different tax and compliance implications:

• Salary – Paid through PAYE and subject to Income Tax and National Insurance. Salary is tax deductible in the company.

• Dividends – Only paid if there are retained profits, with lower tax rates but no National Insurance. Dividends are not tax deductible in the company.

• Director’s Loan – If money is taken from the company without a dividend declaration, it is treated as a loan that must be repaid or taxed.

Director’s loans should generally be avoided unless absolutely necessary. Regularly taking money out of the company without declaring it as salary or dividends can create tax and compliance risks, including:

• Section 455 Tax Charge – If the loan remains unpaid after 9 months following the year-end, a corporation tax charge applies.

• Potential Benefit in Kind (BIK) Charges – If a director’s loan exceeds £10,000 and is not repaid, HMRC may consider it a taxable benefit.

• HMRC Reclassification Risk – If money is frequently withdrawn and later cleared with dividends, HMRC may argue that dividends were not genuinely declared and seek additional tax liabilities.

📌 While director’s loans are legally permitted, we believe that relying on them is not best practice due to the potential tax consequences. Each company should consider its own circumstances and seek professional advice.

Example of Poor Loan Management:

A director withdraws £15,000 throughout the year but does not declare it as salary or dividends. At year-end, the company has no retained profits to clear the loan, triggering:

• A corporation tax charge under Section 455.

• A personal tax charge if the loan is not repaid and considered a benefit.

• Potential HMRC scrutiny if this pattern continues.

Best Practice:

• Declare salary or dividends properly rather than relying on director’s loans.

• Only use loans for short-term funding needs, ensuring they are repaid before the 9-month deadline.

• Keep proper records to justify any loan withdrawals.

If you are currently relying on director’s loans to withdraw funds from your company, seek professional advice to avoid unexpected tax liabilities.

Dividend Tax Rates for 2024/25 and 2025/26

The amount of tax you pay on dividends depends on your income tax band:

2024/25 Dividend Tax Rates

• Basic rate taxpayers (up to £50,270 income) – 8.75%

• Higher rate taxpayers (£50,271 - £125,140 income) – 33.75%

• Additional rate taxpayers (£125,140+ income) – 39.35%

2025/26 Dividend Tax Rates

• Basic rate taxpayers (up to £50,270 income) – 8.75%

• Higher rate taxpayers (£50,271 - £125,140 income) – 33.75%

• Additional rate taxpayers (£125,140+ income) – 39.35%

The first £500 of dividends are tax-free due to the dividend allowance. These rates apply for the respective tax years, but we recommend reviewing updates annually to ensure compliance.

Steps to Declare a Dividend Correctly

1. Check Available Profits

• Review the company’s balance sheet to confirm retained profits.

• Ensure there are sufficient reserves after tax and expenses.

• Profits must be already earned, not based on future income.

2. Hold a Board Meeting & Document the Dividend

• Directors should hold a meeting to approve the dividend.

• Board minutes must record the decision.

• Issue a dividend voucher to each shareholder.

3. Pay the Dividend & Update Records

• Transfer funds from the company bank account to the shareholder.

• Ensure payments match the declared dividend amount.

• Keep records for tax and compliance purposes.

When to Seek Professional Advice

You should consider seeking advice if:

• You are unsure whether your company has enough reserves.

• You want to structure salary and dividends for optimal tax efficiency.

• You have an overdrawn director’s loan account and need guidance on clearing it.

• You need help preparing year-end financial statements.

• Your company has multiple share classes, and you are unsure how dividends should be distributed.

We offer dividend and tax planning sessions to ensure you are compliant and tax-efficient. Contact us to book a review.

Disclaimer

This guide is for educational purposes only and should not be considered tax or financial advice. Directors remain responsible for ensuring that their company has sufficient distributable profits before declaring dividends. Always seek professional advice if you are unsure about your company’s financial position or dividend compliance.

For personalised dividend planning, contact us to arrange a consultation.