Company directors and shareholder pay themselves salary and dividends. Company must set up a PAYE scheme with HMRC before paying salary to any employee including directors. A dividend is a payment made by a company to its shareholders, usually as a distribution of profits. Limited companies are only allowed to pay dividends if they have enough profit available to do so – and the dividend comes out of after tax profit. Company can not pay dividend to the shareholder despite holding huge cash balance.

Company must hold the meeting to of the directors to declare the dividend and issue voucher reflecting the date, amount and name of the shareholder. Dividend should be distributed according the the shares owned by each shareholders.

There will not be any income tax on earnings until pass the personal allowance (currently £12,500 in the 2019/20 tax year). However, there will be NICs if your income passes the NIC Primary Threshold (currently £8,632). Tax-free dividend allowance, which is in addition to your personal allowance. In the 2019/20 tax year this allowance is £2,000. This means that you can earn up to £14,500 before paying any income tax at all. Dividend is tax lower than salary

Dividend Tax thresholds for the 2019/20 tax year

Details	Basic rate	Higher rate	Additional rate
Salary	20%	40%	45%
Tax threshold:	£12,500-£50,000	£50,001 to £150,000	£150,001+
Dividends	7.5%	32.5%	38.1%
Tax threshold:	£14,500-£50,000	£50,001 to £150,000	£150,001+

£50,000 is the maximum income tax payer can take combined salary and dividends without paying higher rate tax.

	2018/19	2019/20
Salary (set at NI Primary Threshold)	£8,424	£8,632
Remaining available for dividend	£37,926	£41,368
Total income ( below high rate)	£46,350	£50,000
Personal allowance	(£11,850)	(£12,500)
Taxable income	£34,500	£37,500
Tax free dividend	(£2,000)	(£2,000)
Dividends taxable @ 7.5%	£32,500	£35,500
Income tax payable	£2,437.50	£2,662.50