Understanding ‘what a dividend is’ is imperative for any small or medium-sized business, and if you run a limited company in the UK. Our guide answers the question ‘what is a dividend’ and how it works for UK businesses, including when you can pay one, and what you need to do to get it right. We’re covering everything you need to know below.
What is a dividend?
A dividend is a distribution of your company’s profits to its shareholders. When your limited company makes a profit (after paying Corporation Tax, VAT, and other liabilities), you can choose to distribute some or all of those remaining profits to the people who own shares in your business.
Who are dividends paid to?
Dividends are paid to anyone who has shares in your business. As a small business owner and director, you are usually a shareholder too. For many owner-managed businesses, paying dividends is a practical and tax-efficient way to take money out of your company.
Want to know more about tax efficient business growth strategies? Contact one of our experts for a free consultation.
Why should business owners pay themselves dividends?
Small and medium business owners should pay themselves dividends for tax efficiency purposes. Unlike a salary, dividends are not subject to National Insurance Contributions. This is true for an employer’s and employee’s portions, which can result in savings for small businesses.
| Top Tip: Note that dividends are not a salary replacement. Instead, they are a distribution of profit. This matters legally and for tax purposes. |
When are you allowed to pay a dividend?
You can only pay a dividend if your company has sufficient distributable profits. This means money remaining after Corporation Tax and other liabilities have been accounted for.
When are you not allowed to pay a dividend?
You cannot pay a dividend from capital. You also cannot pay one if doing so would leave the company unable to meet its debts – this is illegal under the Companies Act 2006.
Our advice is to always check your profits before declaring a dividend. Our accountants can help you confirm this.
How are dividends taxed?
Dividends are taxed differently from salary income as the rates are lower. However, they are subject to increases.
Every UK taxpayer receives a dividend allowance of £500 per tax year (for 2025/26 and 2026/27). Any dividend income within this allowance is tax-free. Beyond this amount, dividend tax rates depend on your overall income tax band:
- Basic rate taxpayers (income £12,571–£50,270): 10.75% from April 2026
- Higher rate taxpayers (income £50,271–£125,140): 35.75% from April 2026
- Additional rate taxpayers (income over £125,140): 39.35%
How do you pay a dividend to yourself as a business owner?
You report and pay dividend tax through your Self Assessment Tax Return. You do not need to notify HMRC if your dividend income falls within the £500 allowance.
How can Accountancy Solutions help with dividends for small businesses?
Getting the foundations right from the start saves your business time and money – and we’re here to help! If you are unsure about your company’s profits, current tax bands, or how to structure your salary and dividend combination for yourself and your employees, speak to one of our friendly, expert accountants by getting in touch.
We hope this guide on what a dividend is was helpful! Next, find out about capital gains tax with our handy article here.