If you run your own limited company, you'll probably pay yourself through a mix of a small salary and dividends. It's still a tax-efficient way to take money out, but it's easy to get wrong. Directors often skip the paperwork, pay out more than the company can afford, or get caught out by a tax bill they weren't expecting. Dividend tax went up this year, so it's worth going through the process step by step.
What's changed for 2026/27
From 6 April 2026 the basic dividend rate rose from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%, announced at the Autumn Budget 2025. The additional rate stayed at 39.35%. The dividend allowance hasn't changed. You do not pay tax on any dividend income that falls within your Personal Allowance, and you also get a dividend allowance of £500 each year. You only pay tax on any dividend income above the dividend allowance. The standard Personal Allowance is still £12,570.
One thing people often miss: the £500 allowance is a 0% band, not extra tax-free income on top of your bands. The first £500 is taxed at 0% but still counts towards your income band.
Step 1: Check the company has enough distributable profit
Having cash in the bank doesn't mean you can pay a dividend. You can only pay one out of accumulated profits that remain after Corporation Tax, including profits kept from earlier years. Before you declare anything:
- Pull up up-to-date management accounts, or at least a reliable profit figure for the year so far.
- Take off an estimate of the Corporation Tax on this year's profits.
- Add any profits kept back from earlier years, as shown in your last accounts.
If the dividend is bigger than that figure, it may be unlawful. You might have to pay it back, or HMRC could treat it as a director's loan, which brings its own tax charges. If you're unsure, check with your accountant first. Five minutes now is far cheaper than sorting it out later.
Step 2: Hold a directors' meeting and record it
GOV.UK says that to pay a dividend you must hold a directors' meeting to 'declare' the dividend and keep minutes of the meeting, even if you're the only director. The minutes should record:
- the date and who was present
- that the directors reviewed the accounts and were satisfied there were enough distributable profits
- the amount declared per share and the payment date
Keep in mind that you must usually pay dividends to all shareholders, in proportion to their shares, unless you have different share classes set up for that purpose.
Step 3: Issue a dividend voucher
For each dividend payment the company makes, you must write up a dividend voucher showing the date, company name, names of the shareholders being paid a dividend and amount of the dividend. You must give a copy of the voucher to recipients of the dividend and keep a copy for your company's records.
Step 4: Pay it properly and record it
Transfer the money from the company bank account to your personal account, and post it in your bookkeeping as a dividend. Don't treat it as wages or a general drawing. If you've been taking ad hoc amounts through the month and calling them dividends afterwards, stop. Declare first, then pay.
Step 5: Work out your personal tax
Your company does not need to pay tax on dividend payments. But shareholders may have to pay Income Tax if they're over £500. Dividends sit on top of your other income, so do the sum in this order:
- Add up your salary and any other non-dividend income.
- Use your £12,570 Personal Allowance against that first.
- Tax the first £500 of dividends at 0%.
- Tax the rest at 10.75% until your total income reaches £50,270, then at 35.75%.
Worked example
Priya is the sole director and shareholder of her consultancy. In 2026/27 she takes a salary of £12,570 and dividends of £40,000, so her total income is £52,570.
- Her salary is fully covered by her Personal Allowance, so there's no Income Tax on it.
- The basic rate band leaves room for £37,700 of dividends (£50,270 minus £12,570).
- The first £500 is taxed at 0%.
- £37,200 at 10.75% = £3,999.00
- The remaining £2,300 falls into the higher rate band: £2,300 at 35.75% = £822.25
Her total dividend tax is £4,821.25. Under last year's rates the same dividends would have cost her about £800 less.
Step 6: Report the dividends to HMRC on time
Dividend tax isn't taken off before you're paid, so you have to tell HMRC yourself. Which route you use depends on how much you received:
- Within your allowances: You do not need to tell HMRC if your dividends are within the dividend allowance for the tax year.
- Up to £10,000: If you do not send a Self Assessment tax return, you must let HMRC know after the end of the tax year (5 April) and before 5 October. You can do this by asking HMRC to update your tax code or by calling the helpline.
- Over £10,000: You'll need to fill in a Self Assessment tax return. If you've never filed one, register by 5 October 2027 for dividends received in 2026/27.
If you already file a return, all your dividends go on it. The online return and payment for 2026/27 are due by 31 January 2028.
Watch out for payments on account
This catches out a lot of directors in their first year. If your Self Assessment bill is over £1,000 and less than 80% of your tax was taken at source, HMRC will usually also ask for payments on account towards the next year's tax. Each one is half of the previous year's bill. In Priya's case, on 31 January 2028 she'd owe her £4,821.25 balance plus a first payment on account of about £2,410.63, so roughly £7,232 in one go. A second payment on account of the same amount follows on 31 July.
Practical tips
- Set money aside: move a percentage of each dividend into a separate savings account for tax. About 11% is a reasonable rule of thumb for basic rate dividends, and 36% for anything in the higher rate band.
- Plan around the £50,270 threshold: if you have some flexibility, compare the cost of going over it this year with taking more next year.
- Keep the paperwork together: store your minutes, vouchers and bank records in one place. Board minutes must be kept for at least ten years.
- Review your salary and dividend mix every year: rates and thresholds change, and what worked last year may not be the best option now.
If you're still deciding whether incorporating makes sense, or you want help with your company's year-end, have a look at our accounting and tax services.
How MyTaxLead can help
We help directors across London and the UK plan their salary and dividends, prepare compliant minutes and vouchers, and file their Self Assessment returns on time. That way you know what you'll owe well before 31 January. Get a free, no-obligation quote and we'll look at how you take money out of your company.