How Do Dividends Work In The UK A Basic Guide

How Do Dividends Work In The UK? A Basic Guide

A sum of money that a company pays to its shareholders is called a dividend. The company can only pay when it has made a profit and is earning cash. Whether you own a limited company or you are the sole shareholder of your business or have few shareholders (you and your partner) the fact remains – your business needs to pay dividends to shareholders. If you are running a limited company and you are new to the world of self-employment, looking to know about how do dividends work, you are in the right place to learn about dividends. 


In this article, you will find about:

  • What is a dividend?
  • How dividends are issued?
  • How much can a company pay for these?
  • Tax on dividend
  • Dividends tax rates for 2021/2022
  • Corporation tax on dividends
  • How much is the dividend allowance?
  • Do they go through payroll?
  • Quick wrap up


What is a Dividend?

It is a profit distribution by the company to its shareholders. When a company earns profit, it pays a percentage of profit as a dividend to shareholders. Whereas a sole trader can not issue them. 

Your company can announce a dividend at any time after calculating corporation tax if it is earning profit. It is paid to all the shareholders according to their share in the business.

 A company must not pay more in dividends than its profits earned in previous and current financial years, that is how do dividends work.


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How are Dividends Issued?

For issuing them, you will need to do the following things:

  • You must make sure that you have enough profit 
  • Call directors meeting
  • Payments distribution 
  • Produce a tax voucher 

You must check your profit & loss statement and balance sheet and make sure you have enough profit in the company. Do not announce a dividend until you are sure of it. A copy of the voucher is given to all recipients; they are distributed according to the percentage of shares owned by each shareholder in the company. You will receive 50% of each dividend if you own half of the shares of the company.

To declare dividends, a short meeting of directors is called and the record of it needs to be kept. 

For each payment of dividend, you need to issue a voucher that shows:

  • Issuance date of a dividend 
  • Name of the company
  • Shareholder’s name to whom the dividend is being paid 
  • Dividend amount 


How Much Can a Company Pay for a Dividend?

A company can only pay dividends when it has profit after paying all the taxes such as VAT, Corporation Tax, and other company’s expenses otherwise, it will be illegal to pay a dividend if a company is not having sufficient profit and it can have a penalty from (HMRC).


Tax on Dividends

If you are running a limited company, this can be a tax-efficient way to operate a business. A company and its employees will not need to pay National Insurance Contributions (NICs) on dividends.

Many owners of limited companies combine dividend payments with low salaries, which is a tax-efficient way to operate their finances and business. 

The dividend issued by your company are non-taxable, however, the dividends which shareholders receive are taxable through the annual Self-assessment.

The dividends that are received from shares that are held within an ISA there is no tax due on them.


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Dividend Tax Rates for the Year 2021/22

The tax rates for dividends are lower than the rates of income tax. That is the reason why dividends are tax-efficient for directors of limited companies. The tax which you pay on income from dividends is based on your tax band.

Once you use your annual tax-free personal allowance, all the dividends you receive after this will be taxed. 

Dividend tax rates for the year 2021/22:


Dividend tax rates for the year 2021-22


  • £12,571 to £50,270 (Basic-rate taxpayers pay) 7.5%
  • £50,271 to £150,000 (Higher-rate taxpayer pay) 32.5%
  • Over £150,000 (Additional-rate taxpayer pay) 38.1%


Do you Pay Corporation Tax on Dividends?

After calculating the profit, the company needs to pay 19% of the corporation tax. Before paying any dividends to the shareholders, corporation tax needs to be paid. 

Along with this tax, all the business expenses (wages of employees, insurance of company etc) are deducted before profit is calculated. 


How much is the Dividend Allowance?

The tax-free limit for them is £2,000 (dividend allowance) in the tax year 2021/22. You can add this allowance to your allowance of £12,570, making a total of £14,570 tax-free income. 

You will still get a state pension and other National Insurance perks if you choose to pay yourself this salary. 

However, you need to register yourself as an employer, and need to file a return of Real-Time Information (RTI).

As an owner of a Limited Company, this is a legal way of paying yourself and the best way of avoiding high taxes. 


Do Dividends Go Through Payroll?

They are separate from payroll as it distributes profit to the shareholders while payroll is a distribution made on wages of the company’s employees for the work they do. 


Quick Wrap Up

The dividend is the payment by a limited company to shareholders from its profits. When dividends are set to payout, they are recorded in the account. The amount of (dividend payment) is calculated by the percentage of the company’s shares that each shareholder has. It is a tax-efficient way to draw money out of your business.

If a company doesn’t have enough profit after paying all the taxes (VAT, Corporation tax) to pay the dividends, then it is illegal to pay dividends. Hope you have got a better understanding of how do dividends work.


If you want to learn more about dividends, or the complex tax issues associated with them, feel free to contact us!


We’re an accounting firm in London offering affordable accounting services in the UK for limited companies, property owners, and self-employed professionals. Get in touch with us today!



Disclaimer: This blog is written for general information on how dividends work in the UK.

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