Paying dividends is a common way to extract profits, particularly for Small and Medium-sized Enterprises (SMEs) and close companies – those controlled by five or fewer shareholders.
However, HM Revenue and Customs (HMRC) and company law impose strict requirements, especially for interim dividends, which are more flexible than final dividends but still demand proper process.
I will break down what you need to know to make sure that you correctly declare interim dividends in the UK.
What is an interim dividend?
An interim dividend is a payment made to shareholders during the company's financial year, before the final accounts are approved.
It's typically declared by the directors, not the shareholders, and doesn't require a general meeting.
It is important to remain compliant when handling dividend payments and to properly declare the dividends.
Improperly declared dividends can:
- Be classed as illegal dividends if not made from profits
- Be reclassified as director loans or salary, triggering unexpected tax
- Raise red flags during an HMRC enquiry, especially in close companies
- Potentially breach the Companies Act 2006
Failure to properly declare dividends may result in penalties or legal action being taken against your business.
If ever unsure about how to properly declare a dividend, it is wise to seek professional advice.
The tax implications behind paying dividends are the main reason why it is worth exploring.
These implications are that dividends are not subject to National Insurance Contributions (NICs) and are taxed at dividend rates, which are currently:
- 8.75 per cent (basic rate)
- 33.75 per cent (higher rate)
- 39.35 per cent (additional rate)
Alongside these different tax rates, every individual gets a £500 dividend allowance (2025/26).
Remember, the company doesn't get corporation tax relief on dividends.
How to properly declare an interim dividend
There are four simple steps for properly declaring an interim dividend.
- Confirm sufficient distributable profits
Under Section 830 of the Companies Act 2006, a company can only declare dividends out of accumulated, realised profits, not from projected earnings or revaluation reserves.
You should review management accounts before every dividend decision.
Make sure profits are available after accounting for liabilities, not just cash.
- Hold a board meeting and pass a resolution
Interim dividends are authorised by directors.
You must hold a board meeting or use a written resolution and record the decision.
To ensure that these meetings will keep you fully compliant, the minutes should include:
- Date of meeting
- Directors present
- Confirmation of profits available
- Decision to pay interim dividend of £X per share
- Date of payment
Keeping a clear paper trail will help protect your business in the event of any queries or investigations.
- Issue a dividend voucher
Each shareholder must receive a dividend voucher containing:
- Company name
- Shareholder name
- Date
- Amount paid
- Type of dividend (interim)
- Tax credit (if applicable, as this was abolished for individuals since 2016)
You must retain a copy of the voucher for your records.
- Make the payment
Dividends should be paid on or shortly after the date of declaration.
A delay may risk HMRC arguing the payment was not truly a dividend.
Avoid "drawing money first, declaring dividend later" as HMRC may treat this as a loan or salary, not a dividend.
Common mistakes to avoid when paying dividends
Always be mindful of the most common pitfalls that companies fall into when trying to pay using dividends.
These common mistakes include:
- Declaring dividends without up-to-date management accounts
- Backdating board minutes or vouchers (this is unlawful)
- Declaring dividends when the company is making a loss, as this creates illegal dividends
- Failing to differentiate between a dividend and a director's loan repayment
For SMEs and close companies, interim dividends can be a tax-efficient way to extract profits, but only if done properly.
Treat the declaration process seriously!
Maintain documentation, check profits, and keep your records clean.
Doing so helps you stay compliant with both HMRC rules and the Companies Act, and avoids unexpected tax or legal consequences.
Seeking professional advice is always a good way to avoid any issues.
