You might have heard the word 'dividends' being tossed around in business circles, but if you're new to the world of self-employment and running a Limited company, you might not know exactly what a dividend is. So, what is a dividend and how do they help you be more tax-efficient?

What are dividends and how do they work?

If your Limited company has made a profit, it can distribute these earnings to shareholders by way of a ‘dividend’. Profit is the money the company has remaining after paying all business expenses and liabilities, plus any outstanding taxes (such as Corporation Tax and VAT).

Understanding Limited company dividends

If your Limited company has made a profit, it can distribute these earnings to shareholders by way of a 'dividend'. Profit is the money the company has remaining after paying all business expenses, liabilities, and any outstanding taxes (such as Corporation Tax and VAT). The main rates of Corporation Tax for the financial year beginning 1 April 2025 are 19%, 25% or 25% with marginal relief.

It's important to remember that dividends cannot be counted as a business expense when calculating your Corporation Tax. It's illegal to pay a dividend if your company does not have sufficient profit after tax available to cover the dividend amount.

Usually, the most tax-efficient way to pay yourself as a director is by taking a combination of a low salary and dividends from your Limited company. We've got an article that explains how it all works – "How much should I take as a salary from my Limited company".

How does your company issue a dividend?

If you want to issue a dividend, then you need to hold a meeting of directors to "declare" the dividend. The meeting needs to be minuted and a record kept of it. This is the case even if you are the sole director of your Limited company, though it may then just be a case of issuing the correct paperwork. If you use a good online accounting software system like Crunch, then it should usually take care of all the admin for you.

For each dividend payment your company makes, you need to issue a dividend voucher that shows the following:

• date the dividend is paid
• company name
• names of the shareholders being paid a dividend
• amount of the dividend.

You should give a copy of the voucher to all recipients of the dividend amount and keep a copy for your company's records.

Dividends should usually be distributed according to the percentage of company shares owned by each shareholder. So, if you own half the company's shares, you should receive 50% of each dividend distribution.

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Understanding tax on dividends

While your company does not pay tax on dividend payments, shareholders may owe personal tax, which is declared via their annual Self Assessment tax return. The primary tax advantage of dividends is that they are not subject to National Insurance Contributions (NICs). This is a significant saving compared to a salary, where for the 2025/26 tax year, employee NICs are charged at 8% on earnings between £12,570 and £50,270; and 2% above £50,270.

Many Limited company owners combine dividend payments with a low salary to operate their business and their personal finances tax-efficiently. You can check out our article "How much should I take as a salary?" for further information.

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The UK dividend allowance for 2025/26

For the 2025/26 tax year, you can earn up to £500 in dividends before paying any tax, thanks to the Dividend Allowance. This allowance is separate from and in addition to your annual tax-free Personal Tax-Free Allowance of £12,570. Any dividend income you receive above this £500 threshold will be subject to tax.

Dividend tax rates and thresholds for 2025/26

Once you have used your Personal Allowance and the tax-free Dividend Allowance, the tax you pay on any further dividends depends on your Income Tax band. For the 2025/26 tax year, the rates are:

• Basic-rate taxpayers pay 8.75%
• Higher-rate taxpayers pay 33.75% (for total income over £50,270)
• Additional-rate taxpayers pay 39.35% (for total income over £125,140)

These income thresholds are frozen until at least April 2028. If you're a Scottish taxpayer, although your Income Tax is based on the Scottish Income Tax Rates, you'll need to calculate and pay any tax due on dividends using the UK tax rates and thresholds.

A simple example for the 2025/26 tax year

A company director with a salary of £12,570 and income from dividends of £50,000 will pay the following Income Tax rates in the 2025/26 tax year. The 2025/26 personal allowance is £12,570.

You can use our Crunch Personal Tax Estimator to estimate the amount of tax you should pay on your total earnings.

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What is the maximum you can take in salary and dividends without paying Higher Rate tax?

To maximise your income within the basic-rate tax band for 2025/26, you can take a salary of £12,570 and dividends of £37,700, for a total income of £50,270.

• Your salary of £12,570 is covered by your Personal Allowance, so no Income Tax is due.
• Your dividends of £37,700 use up your £500 Dividend Allowance.
• The remaining £37,200 of dividends are taxed at the basic rate of 8.75%.
• This results in a total tax liability of £3,255 and a take-home pay of £47,015.

Note: This example is dependent on this being your only source of income. Our article, "How much should I take as a salary?" explains all this in detail.

Note: This example is dependent on taking a salary up to the relevant National Insurance Threshold and this being your only source of income. Our article, “How much should I take as a salary?” explains all this in detail.

Looking ahead: What's next for UK dividend tax?

While the rates for 2025/26 are set, it's important to plan for the future. The government has legislated to freeze the Personal Allowance and basic rate limit at their current levels until April 2028, which will continue to affect how much tax you pay. After this freeze, it is expected that personal tax thresholds will be uprated in line with inflation, providing some potential relief for taxpayers.

If you're a Crunch client currently taking more income than this and want more information about planning your personal tax, please get in touch.

If you're not yet a Crunch client, we can make paying yourself tax-efficiently easy, with all your HMRC payroll and dividend forms taken care of. Even better, you'll get all the support and advice you need, plus all your company tax filing taken care of. We can even prepare and file your annual Self Assessment tax return. Find out more about our great-value limited company accountancy packages.

Want more helpful content?

Be sure to check out our knowledge section for expert insights to help grow your business. Whether you're just starting out and need tips on incorporating or want to know the costs of setting up a Limited Company, we've got you covered. If you've been in business for a while, you'll also find useful guides on topics like requesting your authentication code from Companies House and updating your company's registered office address. Our Knowledge Section has everything you need to succeed.