What are Dividends? Limited Company Dividends Explained

What is a Dividend? How do dividends work? We cover the essentials you need to know as a limited company director in our guide.

By Chris Andreou
Last updated
July 3, 2024
What are Dividends? Limited Company Dividends ExplainedWhat are Dividends? Limited Company Dividends Explained


As a limited company director, you have greater flexibility to work around the tax system, and are able to implement tax optimisation strategies not available via other business structures.

One of these ways is to draw dividends from your company, as opposed to receiving a salary; doing so can help to reduce your tax bill.

If you're newly self-employed, this can be rather confusing.

You might be wondering: How can dividends help reduce my tax bill, and what taxes do I need to pay on them? Are there additional considerations I need to keep in mind?

These are the questions we'll be answering below:

As a limited company director, you have greater flexibility to work around the tax system, and are able to implement tax optimisation strategies not available via other business structures.

One of these ways is to draw dividends from your company, as opposed to receiving a salary; doing so can help to reduce your tax bill. 

If you're newly self-employed, this can be rather confusing.

You might be wondering: How can dividends help reduce my tax bill, and what taxes do I need to pay on them? Are there additional considerations I need to keep in mind?

These are the questions we'll be answering below:

What is a Dividend?

A dividend is a payment of profit that a limited company distributes to its shareholders as a reward for their investment. Dividends can be issued by companies of all sizes but are more common among established firms with stable earnings.

This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off. 

Dividends must be distributed according to the percentage of ownership of each shareholder. Here's an example: if you own 50% of your company's shares, you will receive dividends amounting to 50% of the retained profit. 

Why Do Companies Pay Dividends?

Companies pay dividends for several reasons, reflecting their financial health, strategic priorities, and the preferences of their shareholders. Here are the key reasons:

  1. Rewarding Shareholders: Dividends are a way to return profits to shareholders, rewarding them for their investment in the company. This can help maintain and attract investors, as regular dividend payments can be a sign of a company's stability and profitability.
  2. Signaling Confidence: Paying dividends can signal to the market that a company is confident in its future prospects and cash flow. This can enhance the company's reputation and potentially lead to a higher stock price.
  3. Income for Investors: Many investors, particularly retirees and income-focused investors, rely on dividends as a source of regular income. By paying dividends, companies can attract and retain this type of investor.
  4. Efficient Capital Allocation: Companies with excess cash and limited investment opportunities might prefer to return cash to shareholders rather than sitting on idle funds or investing in projects with lower returns. This is seen as a more efficient use of capital.
  5. Tax Considerations: Dividends are taxed at a lower rate than capital gains, making them an attractive option for shareholders from a tax perspective.
  6. Shareholder Expectations: Once a company establishes a history of paying dividends, shareholders may come to expect regular payments. Continuing to pay dividends can maintain shareholder satisfaction and loyalty.
  7. Market Perception: Regular dividends can positively affect market perception and investor sentiment, contributing to a more stable and potentially higher stock price.

Types of Dividends 

1. Cash Dividends

Description: The most common form of dividend, cash dividends are payments made in cash directly to shareholders.


  • Payment Frequency: Quarterly, semi-annually, or annually.
  • Distribution: Deposited into the shareholder’s bank or brokerage account.
  • Taxation: Subject to dividend tax rates, which are lower than regular income tax rates.


  • Provides regular income.
  • Easy to reinvest in the same or different assets.
  • Preferred by income-focused investors.

2. Stock Dividends (Scrip Dividends)

Description: Also known as scrip dividends, these are payments made in the form of additional shares rather than cash.


  • Payment Frequency: Often used as an alternative to cash dividends during times of cash flow constraints.
  • Distribution: Additional shares are credited to shareholders’ accounts.
  • Taxation: Not immediately taxed as income, but subject to capital gains tax when sold.


  • Increases shareholders' equity in the company.
  • Conserves company cash.

3. Special Dividends

Description: One-time payments made to shareholders, often as a result of exceptionally strong earnings or the sale of a significant business asset.


  • Payment Frequency: Irregular and not part of the company’s regular dividend policy.
  • Distribution: Paid in cash or occasionally as additional shares.
  • Taxation: Treated similarly to regular cash dividends for tax purposes.


  • Significant immediate return to shareholders.
  • Signals strong financial health or excess capital.

4. Interim Dividends

Description: Dividends paid before a company’s annual general meeting (AGM) and before the company's annual earnings have been finalized.


  • Payment Frequency: Typically paid semi-annually or quarterly.
  • Distribution: Paid in cash, like regular dividends.
  • Taxation: Subject to the same tax rules as regular dividends.


  • Provides shareholders with a portion of profits more frequently.
  • Signals confidence in ongoing profitability.

5. Final Dividends

Description: Dividends declared and paid after the annual accounts have been finalized and approved at the company’s AGM.


  • Payment Frequency: Annually, after the end of the financial year.
  • Distribution: Paid in cash.
  • Taxation: Subject to the dividend tax rates.


  • Represents the company’s profitability for the entire financial year.
  • Typically larger than interim dividends.

6. Preferred Dividends

Description: Dividends paid to preferred shareholders, who have a higher claim on assets and earnings than common shareholders.


  • Payment Frequency: Typically paid at a fixed rate, often quarterly.
  • Distribution: Paid in cash.
  • Taxation: Treated like regular dividends but often at a fixed rate, regardless of company performance.


  • Provides a predictable income stream.
  • Preferred shareholders have priority over common shareholders for dividend payments and in the event of liquidation.

7. Property Dividends

Description: Distribution of physical assets instead of cash or stock.


  • Frequency: Rare and situation-specific.
  • Distribution: Physical assets are transferred to shareholders.
  • Taxation: Subject to valuation and taxation rules on the distributed property.


  • Utilizes non-cash assets.
  • Can be a strategic distribution of non-core assets.
  • Diversifies shareholder holdings.

8. Dividend Reinvestment Plans (DRIPs)

Description: Allows shareholders to automatically reinvest their cash dividends in additional shares of the company.


  • Frequency: Aligned with regular dividend payments.
  • Distribution: Additional shares purchased instead of cash payment.
  • Taxation: Dividends are still taxable even if reinvested.


  • Increases investment without transaction fees.
  • Compounds growth over time.
  • Convenient for long-term investors.

How Dividends Are Paid

The process of paying dividends involves several steps and key dates that investors need to understand. Here’s a detailed look at how dividends are paid:

1. Declaration Date

The declaration date is when the company’s board of directors announces its intention to pay a dividend. This announcement includes important details such as the dividend amount, the record date, the ex-dividend date, and the payment date.

2. Record Date

The record date is the cutoff date set by the company to determine which shareholders are eligible to receive the dividend. To be eligible for the dividend, an investor must be listed on the company's books as a shareholder on or before this date. The record date is crucial because it ensures that only those who own the stock at this point receive the dividend.

3. Ex-Dividend Date

The ex-dividend date is usually set one business day before the record date. This is the date on which the stock starts trading without the value of the next dividend payment. If you purchase a stock on or after the ex-dividend date, you will not be entitled to the upcoming dividend. Conversely, if you own the stock before the ex-dividend date, you will receive the dividend even if you sell the stock before the record date.

4. Payment Date

The payment date is when the company actually distributes the dividend to its eligible shareholders. On this date, shareholders receive the dividend in the form of cash or additional shares, depending on the type of dividend declared. The payment date is usually set a few weeks after the record date.

Dividend Paperwork: Getting it Right

dividend paperwork

Dividends are a crucial aspect of a company's financial operations, allowing for the distribution of profits to shareholders. However, the process of declaring, documenting, and disbursing dividends involves significant paperwork and regulatory compliance.

Key Documents Involved

1. Board Resolutions

The board of directors passes resolutions to propose, approve, and declare dividends. These resolutions outline the amount of dividends, the payment date, and other pertinent details. They are a fundamental part of dividend paperwork, demonstrating the legal intent to distribute profits.

2. Dividend Vouchers

A dividend voucher is a document that provides shareholders with information about their dividend payments. It includes the company name, shareholder's name, dividend amount, and payment date. This document is crucial for tax reporting and acts as evidence of dividend receipt.

3. Dividend Registers

Dividend registers record details of each dividend payment made by the company. It includes shareholder names, dividend amounts, dates of payment, and any other relevant information. This register is essential for tracking dividend payments accurately.

4. Tax Forms

Various tax forms need to be completed and submitted to the tax authorities, detailing dividend payments made. These forms ensure that proper tax deductions and reporting are carried out in compliance with tax laws.

How Dividends are Calculated?

Understanding how dividends are calculated is essential for investors seeking to evaluate their potential returns. Dividends are typically calculated based on a company's earnings and its dividend policy.

1. Determining Earnings and Payout Ratio

Earnings: Dividends are paid out of a company’s profits, also known as earnings. The amount of earnings available for dividends is determined after accounting for operating expenses, taxes, and other obligations.

Payout Ratio: The dividend payout ratio is the proportion of earnings a company decides to distribute to shareholders as dividends. It is expressed as a percentage of the company’s net income.

Formula: Payout Ratio=((Dividends per Share(DPS)/Earnings per Share (EPS)) x 100)

For example, if a company has an EPS of £5 and it decides to pay a DPS of £2, the payout ratio is: (£2​/£5) x 100 = 40%

2. Calculating Dividends per Share (DPS)

Dividends per share (DPS) is the amount of dividend paid for each outstanding share. It is calculated by dividing the total dividends paid by the number of outstanding shares.

Formula: DPS = Total Dividends Paid​/Number of Outstanding Shares

For instance, if a company pays £1 million in total dividends and has 500,000 shares outstanding, the DPS is: £1,000,000​/500000 = £2

3. Dividend Yield

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. It is expressed as a percentage and helps investors understand the return on investment from dividends alone.


Dividend Yield = (Annual Dividends per Share​/Shar Price) x 100

For example, if a company’s share price is £50 and its annual DPS is £2, the dividend yield is: £2/£50 x 100 = 4%

4. Calculating Total Dividend Payment

The total dividend payment is the sum of all dividends paid to shareholders. This is particularly relevant for investors who own a significant number of shares.


Total Dividend Payment = DPS × Number of Shares Owned

For example, if you own 1,000 shares of a company that pays a DPS of £2, your total dividend payment would be: £2 × 1,000 = £2,000

5. Interim and Final Dividends

Companies may pay dividends in parts during the financial year. Interim dividends are paid before the annual financial statements are finalized, while final dividends are paid after the year-end results are announced.

Example Calculation:

  • Interim Dividend: £1 per share paid mid-year.
  • Final Dividend: £1.50 per share paid after year-end.

If you own 1,000 shares, your total dividend for the year would be: ( 1,000 × £1) +(1,000 × £1.50)= £1,000 + £1,500 = £2,500

Dividend Payment Process

1. Ensure Availability of Profits

Before declaring dividends, confirm that the company has distributable profits. These are the profits available for distribution after deducting taxes, expenses, and any retained earnings from previous years.

2. Review Company's Articles of Association

Check the company's articles of association for any specific provisions regarding dividend distribution. The articles may outline conditions and procedures for dividend declaration.

3. Hold a Board Meeting

Convene a meeting of the board of directors to propose and approve the dividend declaration. During the meeting:

  • Review the financial statements to verify available profits for distribution.
  • Propose the dividend amount per share and the payment date.
  • Vote and approve the dividend declaration.

4. Prepare Dividend Vouchers

After board approval, prepare dividend vouchers for each shareholder. The vouchers should include details such as shareholder name, dividend amount, payment date, and the company's name.

5. Record Dividends in Company Records

Record the dividend declaration in the company's financial records and dividend register. The register should contain details like the names of shareholders, dividend amount, and date of payment.

6. Ensure Tax Compliance

  • Dividend Allowance: Ensure that the total dividends received by an individual shareholder do not exceed the annual dividend allowance. As of 2024/25, the allowance is £500.
  • Dividend Tax Rates: Understand the tax rates for dividends based on the shareholder's income tax band (basic, higher, or additional rate).
Tax band Tax rate on dividends over the allowance
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%
  • Tax Payment: Shareholders are responsible for calculating and paying any tax due on the dividends they receive.

7. Distribute Dividends

On the declared payment date, transfer the dividend amounts to the shareholders' business bank accounts as specified in the dividend vouchers.

8. Issue Dividend Payment Confirmation

Send confirmation of the dividend payment to each shareholder, detailing the amount paid and the payment date.

9. Retain Documentation

Retain copies of all dividend vouchers, board meeting minutes, and dividend registers for record-keeping and potential future audits.

Apart from dividends, there are other ways to taking money out of a limited company.

Do You Pay Tax on Dividends?

Business owners typically pay themselves through a blend of salary and dividends, as this is a more tax efficient way to operate.

That's because neither the company, nor you (as an employee) are required to pay National Insurance Contributions on dividends. You are required to pay tax on dividends though— and we'll explain more about this in a separate guide on dividend taxes, rates and allowances.

FAQs on Dividends

How often can I pay myself dividends?

You can draw dividends from your company at any frequency across the year, as long as your company has sufficient distributable profits. Payments are typically made on a monthly or quarterly basis.

A common concern among contractors we work with is that HMRC may regard frequent payments as disguised salary. To keep in the good books of HMRC, ensure that you keep clear records and have the right paperwork in place.

Keep your salary and dividend payments separate, as this leaves a clear audit trail. In doing so, you’ll be able to prove that nothing is amiss, and that you’ve gone by the books should HMRC decide to launch a tax enquiry.

Do note that dividends can’t be drawn from contracts that fall within IR35. For further information on off-payroll working rules and what it means for contractors, refer to our comprehensive guide on IR35.

What else can I do with dividends?

You may consider paying dividends into a pension fund, ISA or to family members.

You’ll need to weigh out the pros and cons of each option, and consider the tax and legal implications. This can be complex, and is a decision that is best made after consulting an accountant.

Can a company pay out dividends if it is losing money?

Dividends can't be paid out if a company is losing money. Dividends can only be paid on profits that a company has earned during the year, or from accumulated profits from previous years.

Does paying a dividend reduce a company's corporation tax bill?

Paying a dividend doesn't reduce your company's corporation tax bill. Companies pay Corporation Tax on its profits before dividends are distributed, so paying a dividend doesn't affect your company's corporation tax bill.

Are dividends taxable?

Yes, dividends are generally taxable income. In the UK, there’s a dividend allowance of £500 for the 2024/25 tax year, and tax rates vary based on your overall income tax band.

Can I reinvest the dividends?

Yes, dividends can be reinvested to purchase additional shares through dividend reinvestment plans (DRIPs), allowing shareholders to compound their investment over time.

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