Contractors Guide to Dividends and Dividend Paperwork

You’ll often hear dividends (and the associated dividend paperwork!) mentioned when it comes to the benefits of contracting though your own limited company. But what exactly are dividends? How do you get the paperwork for dividends right?

First things first . . .

What are dividends?

Broadly speaking, a dividend is a payment made from the profit after tax of a limited company. In other words, this is the money remaining in a company after all business expenses and liabilities, including tax and VAT, have been paid. A dividend is paid to a company’s shareholder/s. Dividend payments can be made in addition to the salary taken; more on this later.

Who are dividends for?

Dividends are paid to shareholders of the limited company. For the purposes of this article and simplicity, let’s assume that your company has one owner and one shareholder, i.e. you!

For ordinary shares, the amount of dividends a shareholder can receive is based on the percentage of shares owned; so if you are the only shareholder you’ll receive 100% of each dividend. Every year you get a dividend allowance, currently £500 in the tax year 2024/2025, which is tax free.

Dividend paperwork, and how to declare a dividend?

Regardless of how many shareholders there are, dividend paperwork needs to be completed each time a dividend issue is made. The dividend needs to be declared with a dividend voucher. Shareholders should keep their dividend vouchers as part of their tax records.

The voucher can be sent by email, paper or generated by any number of accounting software packages; like FreeAgent, for example. While there is not a standard template, there are some key pieces of information that need to be included. These are:

• The date
• The company name
• The name and address of the relevant shareholder/s
• The total number of shares owned
• The total dividend payable
• The director’s signature

The dividend voucher is a log for your reference. It is also something that can be requested should HMRC have any questions. If not ‘declared’ correctly the dividends could be treated as unlawful and in contravention of the Companies Act. So always ensure to keep your dividend paperwork up to date, regardless of how tedious it may seem for one person (if this is the case).

The dividend paperwork for the limited company will be slightly different. A ‘directors meeting’ will need to be held (yes even if it is just yourself as the shareholder!), to agree on a dividend issue and to record minutes of the meeting.

You can also choose not to pay yourself dividends and simply leave the profit in the company’s bank account. It is always worth speaking to your accountant before making any decisions for advice on what is best for you and your business.

What is the advantage of dividends?

There can be a definite tax advantage in paying yourself through a combination of PAYE (salary) AND dividends. Usually the most tax effective approach is taking a low salary and a higher dividend, this is because:

• You do not pay National Insurance Contributions on dividends
• You can minimise your personal tax liability (depending on the level of dividends you pay yourself)
• Taking a salary above a certain level will count towards your state pension and other state benefits
• Your salary is a tax deductible expense and so reduces your company’s corporation tax
• You can pay yourself in dividends up to the level of post-tax profit in your company

The real benefit, which your accountant can explain to you further and in more depth, is the fact that you can control when funds are removed from your business and the timing of the tax. That sort of flexibility enables you to run your business as efficiently and effectively as possible.