If you’re in the business world, you’ll likely know about dividends. Essentially, dividends are a way of extracting money from your company – but how much more do you know about them?
Many companies (especially start-ups) remain unaware of the ins and outs of dividends. A common question companies ask is whether or not you need to pay corporation tax on dividends.
It’s important to know about the taxes you’re required to pay as a company and what exactly you’ll be taxed on. To learn more about dividends and whether or not they can affect your company’s corporation tax bill, read on.
Understanding Corporation Tax
What is corporation tax? Corporation tax (also known as company tax) is a type of tax paid with corporate profits. Corporation tax is applied to limited companies in the UK, foreign companies with a UK office or branch, and unincorporated associations (clubs or groups).
If you own a company that has made any taxable profit up to £1.5m, you’ll be required to pay corporation tax within the first nine months of your tax year.
Profits from investments, doing business, or selling assets for more than their original cost will be taxed through corporation tax. But does this mean you’ll be taxed on dividends?
What is a Dividend?
So, what is a dividend? Before learning about whether you pay tax on a dividend payment, it’s vital to understand what they are. Dividends are a portion of earnings made by a company that will be paid to a shareholder, and they’re not considered business expenses.
Typically, you pay dividends through a cash payout, but this varies. Although dividends are usually issued every quarter, they can also be issued both monthly and annually, too. Dividends provide an easy way to distribute money from your limited company to shareholders.
However, not all companies pay dividends. Many companies choose not to pay dividends and instead decide to retain their earnings and invest back into their company.
As dividends are taken from a company’s net profit, it’s ultimately up to the company to decide whether to pay dividends. It’s important to note that if your company doesn’t make enough profit after tax has been paid, then you’ll be legally unable to pay a dividend.
In simple terms, a dividend is a reward that is paid to shareholders for investing in the company. They’re usually paid out of net profits, and although some companies choose not to pay dividends, doing so gives you a great track record and makes your stocks attractive to potential investors in the future.
How Are Dividends Issued?
How are dividends issued? Firstly, the amount of dividends will be decided by the company’s board of directors. Once directors have assessed their most recent earnings, they’ll decide how much to pay out.
Dividend payments don’t always include all the profit made by a company – as mentioned, some companies reinvest a portion of their profits back into their company (known as retained earnings). Dividends are paid in two forms:
- Cash payout – directly paid via check or deposited directly into your shareholder’s account. These are the most common forms of dividend
- Stock dividends – an alternative to a cash payout, you can issue shares of stock to shareholders. This provides a great way to avoid depleting cash reserves
Stock dividends are typically paid in fractional shares. Shareholders will receive a percentage of a share for each share they own within the company.
For example, if your company issues a 3% stock dividend, shareholders will get 0.03 shares per every share they own.
Records and paperwork must be accurately recorded while issuing a dividend. Many directors benefit from working with an accountant, who can help manage administration and effectively keep records.
When issuing dividends, you should use vouchers to provide key details to your shareholders. A dividend voucher validates that your company is sharing its profits with its shareholders. Vouchers should include:
- Your company’s name
- Company address
- Company registration number
- Amount of dividend
- Type of dividend
- Date of the issued dividend payment
- Information of the shareholder
Paying Tax on Dividends
Essentially, dividends are your company’s profits. Profits are classified as any remaining funds left over after any expenses and taxes, including VAT and corporation tax, have been paid. This means that paying a dividend will not affect your company’s corporation tax bill.
Corporate tax and dividend tax are different – shareholders may be required to pay dividend tax on their dividends, but companies issuing them won’t have to. Dividend tax rates vary and are lower than taxable income tax rates.
If you’re both a director and shareholder, it’s possible to pay yourself dividends. If you decide to do so, you’ll need to register for a self-assessment tax return and inform HMRC of any dividend income. You’ll likely need to pay tax on a dividend if it’s over £500 (which is the limit on the tax-free dividend allowance).
Taking Care of Your Accounts at LJS Accounting Services
Several benefits come with having a designated accountant to help take care of your business accounts, including more time, expert advice, and a better chance of growing your business. At LJS Accounting Services, we offer specialised services, helping a wide range of clients, including businesses, with their taxes.
From sole traders to limited companies, we can help all individuals. Our accounts service is one of our most common services, ideal for clients who have their own businesses. Running a business can be tough, and many choose to hire an accountant to deal with their tax affairs.
We aim to take away the stress that comes with running a business and dealing with accounts, allowing you more time to focus on other vital areas of both your work and personal life. Our expert advice, guidance, and support help companies share dividends correctly, ensuring everything is completed accordingly.
If you’d like to find out more about our services, please don’t hesitate to contact us. We look forward to discussing how we can help you.

Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.