If you run a limited company, one of the first questions you’ll ask is how much you can pay yourself in dividends. It’s a fair question, and the answer has a few moving parts: how much profit your company has made, what you’ve already paid yourself as a salary, and which tax band you’ll land in once you add everything together.

For 2026/27, the dividend allowance sits at £500 — meaning the first £500 of dividends you receive each year is tax-free, regardless of your income level. Above that, dividend tax rates depend on which Income Tax band your total income places you in. They’ve increased this year, so it’s worth knowing the current numbers before you decide how much to draw.

Below, we run through the rules that govern dividend payments, the tax you’ll actually pay at each band, and where most directors tend to land when they’re trying to structure things efficiently.

Before the tax question even arises, there’s a legal one. Under section 830 of the Companies Act 2006, a company can only pay dividends out of its accumulated, realised profits — after accounting for any accumulated losses. In plain terms: if there are no profits left in the company after paying Corporation Tax and other liabilities, there are no dividends to pay.

This matters more than people expect. We occasionally see directors who’ve drawn money from the company assuming there would be enough profit to cover it, only to discover partway through the year that there wasn’t. In that situation, the payment isn’t a dividend — it becomes an illegal (or “ultra vires”) dividend. HMRC can reclassify it as a salary, which triggers PAYE and National Insurance on the full amount, or treat it as a director’s loan, which brings its own tax complications.

The practical check: before declaring a dividend, look at your company’s retained profits on the balance sheet. If the number is lower than the amount you want to take, either the dividend needs to be smaller or you need to wait until the next set of accounts confirms there’s enough profit to support it. Keeping your bookkeeping current makes this straightforward; doing it on a guess at year-end does not.

Assuming your company does have distributable profits, here’s what you’ll pay in dividend tax for 2026/27:

• Basic rate band: 10.75%
• Higher rate band: 35.75%
• Additional rate band: 39.35%

These are meaningfully higher than they were a couple of years ago — the basic rate was 8.75% and the higher rate 33.75% before the recent increases — so the maths of salary versus dividends has shifted slightly. Dividends still tend to win on overall tax efficiency for most one-person company directors, but by a smaller margin than it once was.

One thing that catches people out: dividends are treated as the top slice of your income for tax band purposes. So if your salary already puts you close to the higher rate threshold (£50,270 in 2026/27), even a modest dividend could push some of that income into the 35.75% band. You don’t just apply one rate to the whole amount — you work out how much falls in each band and apply the rate to each portion separately.

The £500 dividend allowance sits on top of your personal allowance. You don’t pay dividend tax on the first £500 you receive, but that £500 still counts as income when working out which band the rest of your dividends fall into.

In practice, the most common structure we see for a director of a small limited company is a modest salary combined with dividends to top up to the desired level of personal income.

The salary is usually set at or around the Secondary National Insurance Contributions threshold, which avoids triggering employer’s NI on the wage while still keeping the director in the HMRC system for state pension purposes. Above that, dividends do the heavy lifting — they carry no National Insurance at all, which is the core reason they remain more efficient than additional salary for most directors.

For a director drawing a salary within the basic rate band and taking dividends to bring total income to, say, £50,000, the dividend element would be taxed at 10.75% on anything above the £500 allowance that falls within the basic rate band. That’s noticeably lower than the 20% Income Tax and 8% employee NI that would apply to an equivalent amount of salary.

As income approaches or exceeds the higher rate threshold, the calculation becomes more case-specific. Some directors prefer to leave additional profit in the company rather than draw it into the higher rate, particularly if they don’t need the cash personally right now. Others draw it anyway, because the money is more useful to them now than sitting in a company account. There’s no single right answer — it depends on your cash flow, your other income, and your medium-term plans for the business.

If your only income is a PAYE salary and a small dividend below the £500 allowance, you may not need to do anything. But in most director scenarios, dividend income will need to be reported to HMRC via Self Assessment.

The triggers are: your dividend income exceeds the £500 allowance and falls outside what’s already covered by your unused personal allowance, or your total dividend income for the year is more than £10,000. Given that most directors drawing dividends as a primary income source will be well above £10,000 for the year, a Self Assessment tax return is standard for virtually every company director we work with.

The return is due by 31 January following the end of the tax year (so 31 January 2028 for the 2026/27 year), with the tax due at the same deadline. If you’re filing for the first time, you need to register with HMRC before 5 October following the end of the tax year — so 5 October 2027 for 2026/27. Missing the registration deadline doesn’t remove the obligation to file; it just adds unnecessary stress.

For anyone who’s already filing Self Assessment, dividend income goes on the supplementary pages — it’s not complicated, but the numbers need to be accurate, which means knowing exactly what the company declared and paid in each tax year.

Every dividend payment needs two documents: a board meeting minute approving the dividend, and a dividend voucher for each shareholder. Neither needs to be complicated, but both need to exist.

The dividend voucher should show the date of payment, the company name, the shareholder’s name, the number and class of shares held, and the amount paid per share. The board minute records that the directors met (even if you’re the only director), considered the company’s financial position, confirmed there are sufficient distributable profits, and resolved to pay the dividend.

In a one-person company, this feels administrative for its own sake — and to an extent it is. But the documents serve a real purpose: they establish that the payment was a dividend and not a salary, which is the distinction HMRC cares about. If you’re ever asked to demonstrate that your dividends were properly declared, you need to be able to produce these records. Recreating them later from memory is possible, but it’s avoidable work.

If you’re using Xero or similar software, the bookkeeping entry records the dividend payment against retained earnings rather than as an expense. The vouchers and minutes sit outside the software — they’re usually stored as PDFs alongside the relevant period’s records. We sort this for our limited company clients as part of the year-end process, so nothing gets missed.