How Are Dividends Taxed for Corporation Tax? A Complete Guide

How Are Dividends Taxed for Corporation Tax? A Complete Guide

Dividends are the most tax-efficient way to extract profits from a limited company — but how do they interact with Corporation Tax? Many directors are confused about whether dividends affect their CT600, whether the company pays tax on dividends it receives, and how to report everything correctly.

This guide covers both sides: dividends your company pays out and dividends your company receives, with worked examples and CT600 reporting guidance.

Dividends Your Company Pays — The Basics

When your limited company pays dividends to shareholders, those dividends are not a deductible expense for Corporation Tax purposes. This is the crucial point that trips up many directors.

Here's the sequence:

1. Your company earns profits during the accounting period
2. Corporation Tax is calculated and paid on those profits
3. After Corporation Tax, the remaining profits can be distributed as dividends

Dividends are paid out of post-tax profits. They don't reduce your Corporation Tax bill. This is fundamentally different from salaries, which are an allowable expense deducted before tax.

Worked Example: Salary vs Dividend

Your company has £80,000 of profit before any director payments.

Option A — Pay £40,000 as salary:

• Salary is a deductible expense
• Taxable profit: £80,000 − £40,000 = £40,000
• Corporation Tax (19% small profits rate): £40,000 × 19% = £7,600
• But the director pays Income Tax and NI on the salary

Option B — Pay £40,000 as dividend:

• Dividend is NOT deductible
• Taxable profit: £80,000
• Corporation Tax (19%): £80,000 × 19% = £15,200
• Then £40,000 dividend paid from after-tax profits
• Director pays dividend tax at lower rates (8.75% basic, 33.75% higher, 39.35% additional)

In practice, most directors use a combination — a small salary (typically £12,570 to use the Personal Allowance) plus dividends for the rest. This minimises the total tax and National Insurance bill across both the company and the individual.

Dividends Your Company Receives — The Exemption

If your company receives dividends from another company (for example, it holds shares in another UK company or a quoted company), those dividends are generally exempt from Corporation Tax.

This is known as the dividend exemption and was introduced in the Corporation Tax Act 2009 (Part 9A). It replaced the old "franked investment income" system.

Which Dividends Are Exempt?

Most dividends received by UK companies are exempt. The exemption applies if the dividend falls into one of these categories:

For the vast majority of small companies, the rule is simple: dividends you receive from other companies are not taxable for Corporation Tax.

What Is a "Small Company" for This Purpose?

A company qualifies as "small" for the dividend exemption if it has:

• Fewer than 50 employees, AND
• Either turnover not exceeding €10 million or a balance sheet total not exceeding €10 million

If your company meets these thresholds (and most do), all dividends it receives — whether from UK or overseas companies — are exempt from Corporation Tax with no further conditions.

Reporting Dividends on the CT600

Dividends Paid

Dividends your company pays don't appear in the Corporation Tax computation at all — they're not an expense, so they're not deducted from profits. However, you should ensure they're correctly recorded in your company accounts.

Your CT600 shows taxable profits before dividend distributions. The dividends appear in the company's accounts (as a note or in the statement of changes in equity) but don't change the CT600 figures.

Dividends Received

Dividends your company receives need more attention:

• Box 85 of the CT600 asks for the total income from dividends
• If the dividends are exempt (which they usually are for small companies), they should be shown as non-taxable income
• The exempt dividends are included in total income but then deducted, so they don't increase your tax bill

If you're filing with Taxpipe, the wizard handles this automatically — it asks whether the company received any dividend income and applies the exemption where appropriate.

Dividend Legality — Can You Actually Pay Them?

A company can only pay dividends out of distributable profits — broadly, accumulated realised profits minus accumulated realised losses. You cannot pay dividends if:

• The company has insufficient retained profits (even if it has cash in the bank)
• The company has accumulated losses that exceed its profits
• Paying the dividend would leave the company unable to pay its debts

Paying an illegal dividend has serious consequences. The director may need to repay the dividend, and it could be treated as a director's loan — triggering a Section 455 tax charge of 33.75% on the outstanding amount.

How to Check Distributable Profits

Before declaring a dividend:

1. Prepare up-to-date management accounts (or interim accounts)
2. Check that retained profits (from the balance sheet) are positive
3. Ensure the dividend doesn't exceed retained profits after Corporation Tax

Example: Your company has retained profits of £50,000 from previous years and current-year profit of £30,000 after Corporation Tax. Maximum distributable profits: £80,000.

Dividend Tax for Directors and Shareholders

While this guide focuses on the Corporation Tax position, it's worth understanding the personal tax side too, since most small company directors are also shareholders:

2025/26 Dividend Tax Rates

The dividend allowance for 2025/26 is £500 — the first £500 of dividend income is tax-free.

These rates are significantly lower than income tax on employment income (20%, 40%, 45%), which is why dividends remain tax-efficient despite Corporation Tax being paid first.

The Combined Tax Rate

When you factor in Corporation Tax paid by the company and then dividend tax paid by the individual, the combined effective rates are:

These combined rates compare favourably to employment income when you include both employer and employee National Insurance.

Close Company Surcharge — Does It Apply?

If your company is a close company (controlled by 5 or fewer participators — which includes most owner-managed companies), there's no additional Corporation Tax surcharge on dividends in the UK. The close company rules mainly affect loans to participators (Section 455) rather than dividends.

However, HMRC can challenge dividend payments that they believe are actually disguised remuneration — for example, dividends paid to family members who have no genuine entitlement to shares.

Common Mistakes

1. Deducting Dividends as an Expense

Dividends are paid from after-tax profits. Don't include them as a business expense on your CT600.

2. Paying Dividends Without Sufficient Profits

Always check distributable profits before declaring a dividend. An illegal dividend creates tax and legal complications.

3. Not Documenting Dividend Decisions

Every dividend should have a board minute (or written resolution) and a dividend voucher for each shareholder. HMRC expects proper documentation.

4. Confusing Company Tax With Personal Tax

The company doesn't withhold tax on dividends. The shareholder reports and pays dividend tax through their Self Assessment return.

5. Forgetting Interim Accounts

If you pay dividends mid-year, you need interim accounts to prove sufficient distributable profits at that point — not just at year-end.

Related Articles

• Dividends vs Salary: The Tax-Efficient Mix for Limited Companies
• Director's Loan Account and Corporation Tax
• Corporation Tax Rates 2025/26 and Marginal Relief
• How to Reduce Corporation Tax Legally
• Corporation Tax on Bank Interest: How It Works
• Corporation Tax for Investment Companies

File Your CT600 With Taxpipe

Getting dividends right on your CT600 — especially if your company receives investment income — requires careful reporting. Taxpipe walks you through every step, handles the dividend exemption automatically, and generates an HMRC-ready CT600 with iXBRL accounts. All for just £59 + VAT — no accountant needed. Start filing now →

• Overdrawn Director's Loan Account & S455 Tax Explained
• Close Company Rules & Corporation Tax Explained