Taking Dividends from Your Limited Company

One of the key advantages of owning a limited company in the UK is the ability to take dividends. As a shareholder, you can receive a share of the company’s profits through dividends. But, how often can you take them? And what should you keep in mind before doing so?

In this blog, we will explain the concept of dividends, how often you can take them from your limited company, and the important things you need to consider before making a withdrawal.

What Are Dividends?

Dividends are payments made by a company to its shareholders. These payments come from the company’s profits and are usually distributed on a per-share basis. For example, if a company makes a profit and has declared a dividend, you as a shareholder will receive your share of that profit based on how many shares you own.

In a limited company, dividends are often preferred over salaries because they are subject to lower tax rates, making them a tax-efficient way for business owners to take money from the company.

How Often Can You Take Dividends?

There is no fixed rule for how often you can take dividends from your limited company. However, there are some guidelines you should follow to make sure you’re doing it correctly.

1. Dividends Can Be Taken as Often as You Like, But They Must Be Justified

Technically, there’s no limit to how often you can take dividends from your limited company, but they must be based on the company’s profits. This means you can take dividends as often as you want, as long as the company has enough retained profit to cover the amount you want to withdraw.

The important thing is that you cannot pay dividends if the company doesn’t have enough profit. The company must have made a profit and retained some of it. Taking dividends without sufficient profits can lead to legal issues and penalties.

2. How Often Do Companies Typically Pay Dividends?

Most companies do not pay dividends monthly or weekly. The most common practice is to pay dividends on a quarterly or annual basis. In many cases, business owners will decide to pay themselves a dividend at the end of the financial year, based on the profits for that year.

If your company has consistent profits throughout the year, you might choose to pay quarterly dividends. This allows you to take money out of the company regularly but ensures that you are only paying yourself from the available profits.

3. Dividends Are Declared at the Right Time

To make a dividend payment, the company’s board (or you, if you're the sole director) must formally declare the dividend. This is typically done during a meeting and then recorded in the company’s minutes. This declaration ensures that the dividend payment is official and in accordance with the company’s finances.

If you're the sole director and shareholder, you don't need to hold a formal meeting, but you should still document the decision properly.

Things to Consider Before Taking Dividends

Although you can technically take dividends whenever you like, there are several things you need to consider before making a withdrawal.

1. Ensure the Company Has Sufficient Profits

You can only pay dividends if your limited company has made enough profit and has enough retained earnings (profit from previous years that hasn’t been distributed). Dividends can only be paid from profits after tax, so it’s essential to check your company’s financial records.

If the company is making a loss or if the profits are too low, you cannot pay dividends. Taking dividends when there are no profits or when the company is in debt can be considered illegal.

2. Tax Implications

Dividends are subject to tax, but they are usually taxed at a lower rate than salary income. In the UK, dividend income is subject to the following tax bands (as of the 2024/2025 tax year):

• £0 – £1,000: No tax (this is your Dividend Allowance).

• Basic Rate (20%): Taxed at 8.75% for dividends above your allowance and up to £50,270.

• Higher Rate (40%): Taxed at 33.75% for dividends between £50,271 and £150,000.

• Additional Rate (45%): Taxed at 39.35% for dividends over £150,000.

This makes dividends a more tax-efficient way to pay yourself compared to taking a salary, which is subject to income tax and National Insurance.

3. Cash Flow Considerations

Even if your company has made a profit, you need to ensure that the company has enough cash available to pay the dividend. A company might show a profit on paper but might not have enough cash in the bank to pay out dividends. Always check your company’s cash flow to avoid any issues.

4. Don’t Take Dividends Instead of a Salary

While taking dividends is an attractive option, it’s important to remember that dividends cannot replace a salary. If you are a director and working for the company, you should be paying yourself a reasonable salary. If you only take dividends and no salary, HMRC may classify you as not paying yourself enough National Insurance, which can lead to penalties.

5. Consider Future Growth and Investment

If you are taking dividends regularly, you may be limiting the funds available to invest back into the business. You should carefully balance taking money out of the company with maintaining enough funds for business growth, equipment purchases, or unexpected costs.

Conclusion

In summary, you can take dividends from your limited company as often as you like, but there are some important conditions you need to follow:

• Profits: You can only take dividends if the company has sufficient profits.

• Legal Formalities: Dividends must be declared and properly documented.

• Tax Considerations: Dividends are taxed differently from salaries, and you need to be mindful of your personal tax position.

• Cash Flow: Make sure the company has enough cash to pay the dividend.

As a limited company owner, it’s essential to maintain a balance between paying yourself dividends and reinvesting in your business. Always seek advice from a financial advisor or accountant to ensure you are complying with tax rules and making the best financial decisions for your company.

At Breaking the Mould Accounting, we specialize in helping business owners navigate complex financial decisions, including dividend management and tax planning. Our expert accountants are here to provide you with the guidance you need to optimize your business finances while ensuring compliance with all regulations. Contact us today to find out how we can help you break the mould and take your business to the next level!