How to pay dividends from a limited company, and record them in Xero

Short answer: a UK limited company can pay a dividend only out of profit kept after corporation tax (its distributable reserves: retained earnings from past years plus this year’s profit after tax, minus dividends already paid). The directors decide it, write a short minute, give each shareholder a dividend voucher, and pay it in proportion to their shares. Whether the company should pay that much is a separate check: profit is not cash, so look at the bank balance after VAT, corporation tax and next month’s bills too. For 2026-27 the shareholder pays dividend tax of 10.75% (basic rate), 35.75% (higher) or 39.35% (additional) above a £500 dividend allowance. In Xero, dividends go to an equity account, never an expense, so they do not reduce profit. A worked example and the Xero steps are below.

This guide covers UK limited companies. Sole traders and partners do not pay dividends: what they take out is drawings (owner drawings in Xero). In Australia and New Zealand dividends carry franking or imputation credits and money a company lends its owner falls under different rules: see Division 7A loans for Australia.

The two limits: what the law allows and what the bank allows

Check	Question	Where to find it
Legal limit	Is there enough profit kept after tax to cover it?	Balance Sheet in Xero: retained earnings + current year earnings, less corporation tax not yet booked, less dividends already paid
Cash limit	After paying it, can the company still pay its VAT, corporation tax and bills?	Bank balance, the next VAT return, the corporation tax due date, a month of running costs

A dividend above the legal limit is unlawful: the shareholder can be made to pay it back, and HMRC may treat it as a loan on the director’s loan account or as salary. A dividend inside the legal limit but above the cash limit is legal and can still leave the company unable to pay its tax bill.

A worked example

A one-director IT consultancy in Leeds, year end 31 March 2027. The director owns all the shares, takes a salary of £12,570 through payroll (why that figure: salary vs dividends for a director), and wants a dividend in October 2026.

The legal limit, from the management accounts to 30 September 2026:

Line	Amount
Retained earnings brought forward (profit kept from past years)	£8,000
Profit before tax, 1 April to 30 September 2026	£22,000
Less corporation tax on it at 19% (not yet booked in Xero)	(£4,180)
Less the dividend already paid in July 2026	(£6,000)
Available to pay as a dividend	£19,820

Corporation tax is 19% because the company is on course for profits under £50,000 for the year (the small profits rate; between £50,000 and £250,000 marginal relief applies and the rate rises towards 25%). The corporation tax calculator works out the tax for any profit figure.

The cash limit, the same day:

Line	Amount
Bank balance	£21,000
Less VAT due in November	(£4,200)
Less corporation tax for the year to 31 March 2026, due 1 January 2027	(£3,100)
Less one month of running costs kept as a buffer	(£3,500)
Safe to pay out	£10,200

The law allows £19,820; the bank allows £10,200. The director declares £10,000. Paying the full £19,820 would leave the company £9,620 short of what it owes by January, which is how profitable companies end up asking HMRC for time to pay (can’t pay your tax bill on time?).

The director’s tax. Dividends in the 2026-27 tax year are the July £6,000 and the October £10,000, £16,000 in all. The salary uses the £12,570 personal allowance, so the first £500 of dividends is covered by the dividend allowance and the other £15,500 is taxed at 10.75%: £1,666.25. Salary plus dividends is £28,570, well inside the basic rate band (up to £50,270). Dividends over £10,000 in a tax year mean a Self Assessment return, so this tax is due by 31 January 2028. Setting money aside as each dividend is paid avoids a surprise; how much to set aside for tax shows how.

Paying it: the paperwork

1. Check the figures (the two tables above), using management accounts that are up to date, not last year’s accounts alone.
2. Hold a board meeting and minute it, even if you are the only director: the date, the amount per share and the payment date.
3. Write a dividend voucher for each shareholder: company name, shareholder name, date, number of shares, the amount, and a director’s signature. Keep it with the company records; it is not filed at Companies House.
4. Pay in proportion to shareholdings. With two shareholders holding 60 and 40 shares of the same class, a £10,000 dividend is £6,000 and £4,000. Different amounts need different share classes, set up in advance.

Interim dividends (during the year) are declared by the directors. A final dividend (after the year end) is usually approved by the shareholders as well, which in a one-person company is the same person signing twice.

Recording dividends in Xero

Xero’s default chart of accounts has no dividends account, so add one once:

1. Go to Accounting > Chart of accounts > Add account. Choose type Equity, name it Dividends paid, pick an unused code, and tick Enable payments to this account so you can use it in bank reconciliation. Your accountant may already have one, sometimes called “Dividends”.
2. Declared and paid the same day: when the transfer to the shareholder appears in the bank feed, reconcile it as a Spend Money coded to Dividends paid, tax rate No VAT. Put “Interim dividend, voucher dated 15 Oct 2026” in the description.
3. Declared now, paid later (or left in the company): post a manual journal on the declaration date: debit Dividends paid £10,000, credit the Director’s loan account £10,000. When the money is transferred, code the bank payment to the director’s loan account. A dividend left unpaid sits there as money the company owes the director.
4. At the year end your accountant takes the year’s dividends paid off retained earnings in the annual accounts.

To check what is available before the next dividend, run the Balance Sheet and look under Equity: Retained Earnings, Current Year Earnings and your Dividends paid account. Current Year Earnings is usually before corporation tax, because the tax is booked at the year end, so take the tax off yourself as in the table above. How to read your Balance Sheet in Xero explains the layout and retained earnings explains the running total.

Common mistakes

• Coding the dividend to an expense or to wages. A £10,000 dividend coded to an expense cuts the year’s profit by £10,000, which understates corporation tax by £1,900 at 19% until someone finds it, and makes the next dividend check look worse than it is.
• Paying it through payroll. Dividends are not salary; they have no PAYE or National Insurance and do not belong on a payslip.
• Monthly transfers with no declaration. Money taken “on account of dividends” without a minute and voucher is a loan on the director’s loan account until a dividend is properly declared, and an overdrawn account can cost s455 tax.
• Checking last year’s accounts only. A loss since the year end reduces what can be paid. Use current management accounts.
• Forgetting the cash. Retained earnings can be large while the bank is not; profit in Xero but no cash in the bank shows where the difference usually goes.

Common questions

How much dividend can I pay myself? Up to the company’s profit kept after corporation tax (retained earnings plus this year’s after-tax profit, minus dividends already paid), and only as much of that as the company’s cash can spare after VAT, corporation tax and its bills. How much can I pay myself? covers the cash side for any business.

How often can a limited company pay dividends? As often as the directors like, monthly or quarterly included, as long as each one is checked against the profit available at the time and has its own minute and voucher.

What is the dividend tax rate for 2026-27? 10.75% for basic rate taxpayers, 35.75% for higher rate and 39.35% for additional rate, on dividends above the £500 dividend allowance. The basic and higher rates rose by two points on 6 April 2026.

Do dividends go on the profit and loss in Xero? No. A dividend is a share of profit already made, not a cost of making it, so it goes to an equity account and appears on the Balance Sheet. It does not reduce profit or corporation tax.

What happens if I paid a dividend without enough profit? It is an unlawful dividend. The shareholder may have to repay it, and in practice it is often reclassified as a loan on the director’s loan account, which can bring s455 tax if it is not repaid within nine months and one day of the year end. Talk to your accountant before the accounts are finalised.

Do I need to tell HMRC about a dividend? Not when it is paid. The shareholder reports dividends over £10,000 in a tax year on a Self Assessment return; below that, HMRC can collect the tax through your tax code instead if you tell them.

Seeing it every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: sales and profit against last month and last year, cash in the bank, who owes you and bills due soon. It does not declare dividends or track retained earnings, but seeing profit and cash side by side each week is exactly the pair of numbers a dividend decision needs. It asks Xero for read-only access, and there is a 14-day free trial with no card, then plans start at US$19 a month.