Dividends are often called the most tax-efficient way to extract money from a limited company. That is broadly true. But to use them well, you need to understand what dividends actually are, when they can be paid and how they interact with everything else you are doing.
Updated 2026/27 · LimitedCompanyTaxCalculator.co.uk · Editorial standards · Methodology
A dividend is a distribution of post-corporation-tax company profit to shareholders. Post-corporation-tax is the key phrase. Dividends can only be paid from profits that already exist in the company after the corporation tax charge. They are not a company expense and do not reduce the corporation tax bill.
A dividend cannot lawfully be declared if it exceeds the company's distributable reserves, the accumulated post-tax profits not yet distributed or used for other purposes. An unlawful dividend paid without sufficient reserves is treated as a loan to you by HMRC, with significant additional tax consequences.
For a company in its early years or following a loss, checking available distributable reserves before declaring a dividend matters. The available dividends figure shown in this calculator is the post-tax company profit available for distribution from the current period's profit assumptions.
Dividends above the £500 annual allowance are taxed at three rates, depending on which income tax band they fall into once all other personal income is counted.
Basic rate: 10.75% on dividends within the basic rate band. Higher rate: 35.75% above £50,270 total income. Additional rate: 39.35% above £125,140.
These rates have changed significantly in recent years. The 2026/27 rates are higher than those that applied in 2021/22 or 2022/23. Always use the current year's rates for planning rather than older articles.
The dividend allowance was reduced from £2,000 to £1,000 in 2023/24 and then to £500 in 2024/25. For 2026/27, the allowance remains at £500.
Dividend tax is calculated after all other personal income has been counted. Salary comes first, then other income, then dividends. The rate you pay on dividends depends on how much personal allowance and basic rate band remains after salary and other income.
For example: salary of £12,570 and dividends of £37,700. The salary uses the personal allowance. Dividends sit in the basic rate band and are taxed at 10.75% above the £500 allowance, a total dividend tax bill of approximately £3,997. Personal take-home on £50,270 of income is approximately £46,273.
If you also have other personal income, property income, a part-time employment, income from elsewhere, the bands remaining for dividends change accordingly.
Not all profit needs to come out immediately. Profit retained in the company has paid corporation tax at 19–25%. If the marginal rate on immediate extraction is 35.75% dividend tax, retaining and extracting later, when you are in a lower band, can produce a better outcome.
Retained cash can fund future investment, provide a working capital buffer or accumulate for a larger future distribution. The retained profit calculator on this site shows what remains after chosen salary and dividends at various profit levels.
The decision between extracting now and retaining is not purely a tax question. Liquidity needs, investment plans and long-term goals all matter. But including the retained profit figure in your extraction decision is better than defaulting to taking everything out.
10.75% in the basic rate band, 35.75% in the higher rate band, and 39.35% in the additional rate band. The first £500 of dividends is covered by the dividend allowance.
Only when the company has sufficient distributable reserves, accumulated post-tax profits not yet distributed. A dividend that exceeds available reserves is unlawful and treated as a director's loan by HMRC.
No. Dividends carry no NI for you or the company. That is why they are generally more efficient than salary above the basic rate income tax threshold.
Dividends in the higher rate band are taxed at 35.75%. A common approach is to plan the salary and dividend mix to keep total personal income below £50,270 for 2026/27.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.