Demystifying Dividends for Contractors
This guide explains dividends for contractors, covering how they work, declaration process, tax advantages, and critical considerations, aiming to aid contractors in maximizing their income effectively.

Understanding Dividends for Contractors
As a contractor operating through a limited company, dividends are a key consideration. Unlike salaries, they do not attract National Insurance contributions, making them a tax-advantageous method of drawing income once you surpass the National Insurance threshold. So, how exactly do dividends function for contractors?
Declaration Process
Before disbursing dividends, it’s necessary to convene a directors' meeting to officially declare the dividend and keep minutes of the meeting — even if you're the sole director. With each dividend payment, you must create a dividend voucher indicating the date, company name, names of shareholders receiving the dividend, the payment amount, and the signature of the director. Shareholders must receive a copy of the voucher, and the company should retain another copy for its records.
Splitting Dividends
If you're married or in a civil partnership, there's an opportunity to split dividend payouts. For this to occur, your partner must own a share percentage of the company. The dividends will be distributed based on the shares each of you holds. For instance, if a husband and wife both possess 50% shares, they will each receive 50% of the declared dividend.
Tax Advantages of Dividend Splitting
Navigating tax benefits can be advantageous, especially for contractors earning above the higher-rate tax threshold, while their spouses are earning below it and possess an unused personal allowance. By utilizing the lower earner’s tax allowances, the overall tax burden on dividends can be significantly alleviated, boosting the contractor's take-home pay.
The Impact of IR35 on Dividends
A significant factor in managing dividends is the IR35 legislation. Contractors determined to be within IR35 for specific contracts cannot opt for the low salary and dividend strategy; their income must be accessed as a salary and taxed accordingly through PAYE income tax and National Insurance contributions.
Calculation of Distributable Profits
To find out how much of your profits can be distributed as dividends, you must first subtract company expenses including salaries and taxes from your total profits and then pay corporation tax on the remaining amount. The funds left over are then termed 'retained profits' and can be allocated as dividends.
Dividend Tax Rates
Tax rates applicable to dividends fluctuate based on the income tax brackets. For the tax year 2024/25, the following rates apply:
- Tax-free allowance: £500
- Basic rate (BR): 8.75%
- Higher rate (HR): 33.75%
- Additional rate (AR): 39.35% for income exceeding £150,000.
Key Considerations
- Uniformity in Dividend Distribution: Dividends must be distributed concurrently to all shareholders, with amounts reflecting their share percentage.
- Available Profits: Ensure profits are available rather than anticipated profits; dividends can only be drawn from realizable profits.
- Exclusive of Corporation Tax: Remember, dividends are disbursed after paying corporation tax and do not reduce the corporation tax supported by the company.
Conclusively, understanding dividends and effectively managing them will empower contractors to enhance their net earnings while complying with prevailing tax obligations.