Contractor’s Guide to Dividends

Request Callback

What are dividends?

Quite simply, dividends are an additional (and alternative) way of paying yourself from the profits available in the company. Dividends are a portion of the company’s earnings that are returned to shareholders i.e. you the contractor; this is profit you receive after tax.

How do dividends work?

Some limited company shareholders receive a salary they draw from the company, this attracts both employers and employees National Insurance, with the remaining profits taken as a dividend which does not attract National Insurance. Of course company owners don’t need to take all available funds from their company, they can leave the money within the company and make use of tax planning (we would advise speaking to an accountant about this).

What if there are two or more shareholders?

On the whole if there are two shareholders (this could be two contractors or a family partnership arrangement), all shareholders will receive their dividends at the same time e.g. two contractors, both with 50% shareholding, will receive 50% of whatever dividend is taken, even if one contractor did all the work and the other was on holiday. This is an important consideration if choosing to go into a partnership as disputes about workload often occur at dividend time.

When and how often can dividends be taken?

Dividends can be paid at anytime providing there are available profits. It’s entirely up to you when and how much you pay, they are your profits after all.

What is a dividend declaration / dividend voucher?

A dividend voucher is simply a way to keep a record of when, how much and who has received a dividend.

The dividend voucher should include your:

  • Limited company name
  • Name and address of shareholder
  • Total number or percentage of shares owned by shareholder
  • Amount of tax credit
  • Dividend amount paid
  • Date
  • Signature of the company director

Do I need to be inside or outside IR35 to be eligible to be paid through dividends?

You must be outside IR35 to receive dividend payments.

Do I pay tax on Dividends?

Yes. It’s a little complex due to issue around allowances and the fact that company profits have already been taxed, but as a rough guide once you have exceeded the combined total of your personal allowance and basic rate tax band, the overall rates are similar to the personal higher tax bracket of 40%.

Special note: in the summer of 2015 the government announced that they were planning to change the current dividend system. The 10% tax credit on dividends will be abolished and dividends will be taxed on a threshold system as set out below. Please find the rates below:

Tax-free dividends First £2,000 of dividends per tax year
Basic rate (7.5%) Total income up to £46,350
Higher rate (32.5%)  Total income up to £150,000
Additional rate (38.1%)  Total income above £150,000

We hope you found this guide useful. If you have any further questions about dividends or contracting then please contact us on 01442 275789 or email

Request a Call Back

We want you to know exactly how our service works and why we need your details. Please read our Privacy Policy before you continue.