If you run a limited company and are wondering how (or when) you can take a dividend, you’re not alone. Many business owners assume that once there’s cash in the bank, a dividend is fair game — but it’s not that simple.
In this article, we’ll walk through the practical and legal steps required to pay a dividend, and explain when it might not be advisable — especially for early-stage companies.
What is a dividend?
A dividend is a payment made by a company to its shareholders out of accumulated realised profits. It’s a way of extracting value from the business — typically more tax-efficient than salary — but subject to specific legal conditions.
Can you just pay one? Not quite…
Before paying a dividend, your company must:
- Have sufficient retained profit (not just cash)
- Ensure no prior-year losses wipe out available reserves
- Prepare either final year-end accounts or interim management accounts to demonstrate that profit is available
- Follow the Companies Act 2006, Section 830, which prohibits distributions that would leave the company with negative reserves
If you pay a dividend without satisfying these criteria, it could be deemed illegal — and directors/shareholders may be required to repay it.
Interim vs. final dividends
There are two types of dividend:
- Interim dividends: Can be declared by directors during the year, based on interim accounts.
- Final dividends: Declared after the year end, typically at an AGM or similar meeting, based on full statutory accounts.
In most small companies, interim dividends are more common and practical — but the financial documentation must still stand up to scrutiny.
What you must do to pay a dividend properly
To pay a dividend legally and cleanly:
Check the accounts: Are retained profits available?
Hold a board meeting (or document a written resolution) to declare the dividend
Prepare a dividend voucher showing:
- Date
- Shareholder name
- Amount paid
- Company name
Pay the dividend to shareholders, ideally via bank transfer labelled appropriately
Even if you’re a sole director / sharegolder, these steps still apply — the paperwork matters.
Don’t pay a dividend in your first year without caution
In your company’s first year, it’s common not to have sufficient accumulated profits — even if income has been received. This is because:
- Year-end accounts may not yet be prepared
- Early-stage costs can offset any apparent profit
- Directors’ responsibilities include prudence — paying a dividend too soon can breach duties
Many advisers recommend waiting until your first year-end accounts are finalised, unless you’re confident in your interim position. This could be achieved though the production of interim accounts; however, that may not be cost-effective in the first year.
What about tax?
Dividends are not deductible for Corporation Tax — but they are taxable income for shareholders.
For individuals, dividend tax rates (as of 2024/25) are:
| Band | Dividend Tax Rate |
| Basic Rate | 8.75% |
| Higher Rate | 33.75% |
| Additional Rate | 39.35% |
You also get a £500 dividend allowance, after which the above rates apply.
If you’re taking both salary and dividends, planning the right balance can optimise your personal tax — but this should be based on accurate forecasting and advice.
Summary checklist
Before paying a dividend:
- Is your company profitable after all costs, including salaries?
- Are there retained earnings (not just current-year profits)?
- Have you prepared appropriate accounts to support the decision?
- Have you documented the dividend with a board resolution and voucher?
If in doubt, hold off — or speak to a provider of accounting support like us.
Need help with dividends?
At My Finance Department, we help business owners plan tax-efficient ways to extract value from their companies — legally and strategically. We offer:
- Support with dividend planning and documentation
- Cashflow forecasts to help you plan ahead
- Profit growth models so you don’t take out more than your business can afford
