Shares and shareholders

Paying dividends and paying tax

At the end of a calendar year, a company's board decides whether the business has done well enough to pay shareholders a dividend. A dividend is a part of the company's profits that is given to shareholders. In larger companies, it is common for an interim dividend to be paid at the half-year point. The dividend is calculated per share, so the more shares you own, the more money you get. Dividends attract income tax, but not National Insurance charges.

Many company share schemes allow employee shareholders to reinvest dividends in further shares called dividend shares. A maximum of £1,500 in dividends can be reinvested in this way each year. If an employee holds these shares for three years, they pay no income tax on them. If not, the dividend used to pay for the shares becomes taxable.

Read information on taxation and dividend shares on the HM Revenue & Customs (HMRC) website - Opens in a new window.

When paying dividends, the company must send a dividend voucher to the shareholder by post. This shows the amount of the dividend and the amount of tax credit. The tax credit indicates the amount of tax paid by the company on the shareholder's behalf. Dividends are paid after tax has been deducted at the basic rate. If you pay a higher rate of tax, you may be liable to pay additional tax on your dividend.

Companies can pay dividends electronically if a shareholder agrees to it. Companies no longer need to send a dividend voucher in such cases.

Subjects covered in this guide

• Introduction
• What are shares and why are they issued?
• How are shares issued?
• Types of shares
• Sale and transfer of shares
• Paying dividends and paying tax
• Making changes to share capital
• Here's how I managed the shareholders in my business

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