What Are Dividends?

Dividends are a way for companies to share profits with their shareholders. If you own shares in a business—either as an investor or as a director of your own limited company—you may receive dividend payments. But they come with responsibilities and tax implications.

This guide covers what dividends are, how they work, when they’re paid, and what both investors and company directors need to know.

What Are Dividends?

A dividend is a portion of a company’s profits paid out to its shareholders. Dividends are not guaranteed—they can only be paid if the company has sufficient profits after covering costs and liabilities.

Dividends are common in both publicly listed companies and private limited companies. For small businesses, especially owner-managed companies, dividends are often a tax-efficient way to extract income.

How Do Dividends Work?

Dividends can only be paid out of retained profits—money left over after all expenses, tax and liabilities have been settled. The board of directors must formally declare a dividend and keep proper records, including:

• A board meeting (even if you're the only director)

• A dividend voucher showing the date, amount, and recipient

Dividends must be distributed according to shareholding percentages unless different share classes are issued.

When Do I Get Dividends?

It depends on the company. Public companies may pay:

• Quarterly

• Twice a year (interim and final dividends)

• Annually

Private limited companies have more flexibility and can pay dividends at any time, as long as they meet the legal and accounting requirements.

Why Do Companies Pay Dividends?

Dividends reward shareholders for investing and show that a company is financially healthy. They are often used to:

• Provide income to shareholders

• Increase investor confidence

• Offer a tax-efficient method for director-shareholders to draw income

• Maintain investor loyalty

Companies that retain all profits may see a fall in share price or shareholder satisfaction.

How Are Dividends Paid?

Dividends are usually paid:

• In cash, to a shareholder’s bank account

• By issuing more shares, known as a stock dividend (less common in private companies)

The company issues a dividend voucher as proof, which includes:

• Company name

• Date of payment

• Total dividend amount

• Shareholder’s name

• Number of shares held

• Dividend per share

Should I Reinvest Dividends?

Reinvesting dividends allows shareholders to buy more shares, which can compound returns over time. This is known as a dividend reinvestment plan (DRIP). Many large investment platforms offer automatic reinvestment options.

Whether you reinvest or withdraw depends on:

• Your financial goals

• Income needs

• Tax position

• Market conditions

What Is the Tax Rate on Dividends?

Dividends have their own tax treatment in the UK. For 2024–25:

• The first £500 of dividend income is tax-free (dividend allowance)

• Basic rate taxpayers pay 8.75%

• Higher rate taxpayers pay 33.75%

• Additional rate taxpayers pay 39.35%

Dividends are taxed after salary and other income, which may push you into a higher band.

How Do I Pay the Tax on Dividends Received?

If you receive:               

• Less than £10,000 in dividends: HMRC may adjust your tax code or you can report it via a phone call or online

• Over £10,000: You must register for Self Assessment and report the income through a tax return

Tax is not deducted at source, so it’s your responsibility to report and pay the correct amount.

What Are Director Responsibilities When Taking Dividends?

As a director of a limited company, you must:

• Ensure the company has sufficient distributable profits

• Hold a board meeting to declare the dividend

• Issue dividend vouchers

• Record the transaction in the company accounts

• Avoid paying illegal (unlawful) dividends—this can have legal and tax consequences

You should also consider timing, especially if a dividend will push you into a higher tax bracket.

Final Thoughts

Dividends are a useful and often tax-efficient way to distribute profits to shareholders. Whether you're a passive investor or a director-shareholder, understanding how dividends work can help you manage income and plan for tax.

Just remember: dividends can only be paid when a company is in profit, they must follow proper procedures, and tax rules apply. If you’re unsure, it’s wise to speak to an accountant—especially if you run your own company or have substantial investment income.