How and when to issue dividends

If you're running a profitable business, dividends can be a tax-efficient way to pay yourself. That said, most tech startup founders stick to a salary—either because their business isn’t profitable yet or they’ve got external investors pushing for reinvestment over payouts.

When considering dividends, know that it’s not as simple as transferring money from your business account. Before you pay yourself, there’s a whole process: profits, taxes, and paperwork. Dividends can only come from post-tax profits, and there are rules to follow.

Here’s the must-know guide for every startup founder thinking about taking dividends. But before we get deep into the details, try out our dividend vs. salary calculator to see how different income combos affect your personal tax.

Key points to note before taking dividends:

• Dividends can only be paid out of profits: You can only pay dividends if your company has made post-tax profits. Your corporation tax bill is due after your financial year ends, so you always need to leave enough cash in the business to cover this liability to HMRC. 
• Corporation tax is payable first: The company pays corporation tax (currently 25% for profits above £250,000 and lower for smaller profits) on its profit. After that, you can select dividends to pay yourself. However, you can’t usually pay yourself once a year after your accounts are filed. As a result, a good guardrail is to pay yourself out only 75% of everything you intend to pay out of the business so that you leave a quarter to cover your Corporation Tax liability. 
• Pay all shareholders proportionately: As as side-note, if you have any other shareholders, their shares are usually also eligible to receive dividends (they may not be, but usually they are). In this common case, if you own 60% of the shares, you’ll receive 60% of the dividend payout, and the other shareholders must get their share based on their percentage. You can’t selectively pay dividends to yourself or anyone else unless you’ve set up different share classes with varying dividend rights.
• Proper documentation is good practice. You can pay yourself dividends on a monthly, quarterly, or any other schedule, as long as your company has enough post-tax profits to cover it. It’s important to document each payout with board minutes and a dividend voucher at the time of payment. If you want to avoid creating paperwork too often, you could consider taking a Director's Loan throughout the year and repaying it with a single dividend payment at year-end. Just be cautious of the £10,000 loan threshold, as going over this amount may classify it as a 'benefit in kind', which has tax implications. It's best to check with your accountant to see if this option works for you.
• Personal Tax on Dividends: Don’t forget that your dividends will be taxed personally after they are received, so after you pay the money out to yourself, you will have to pay the tax to HMRC in your self-assessment return. Here is a link to the tax rates on Dividends: www.gov.uk/tax-on-dividends 

How to pay yourself dividends:

1. Decide on Salary vs Dividend: use our calculator to help decide.
2. Record the dividend payout: Use the Board Minutes (Template) & Dividend Vouchers (Template) templates for proper documentation.
3. Pay the Dividend: Transfer the respective amounts to each shareholder.
4. Make sure to save enough money personally to cover the tax on dividends.