Dividends frequency: how often is too often with dividends?
At least one eagle-eyed ContractorUK reader noticed that our contractor dividends guide for 2025-26 didn’t include ‘dividends frequency,’ AKA the frequency of drawing dividends.
Dividends frequency: more than one answer
That’s partly because an aspect of dividends that we did include -- which constitutes an important condition of correct dividends usage -- partly answers the issue.
In fact, one very acceptable answer to the question of ‘How often is too often with dividends?’ is that dividends paid without sufficient retained (after-tax) profits, will be considered unlawful under company law, writes chartered certified accountant Dan Mepham, boss of SG Accounting.
Therefore, directors could be personally liable to repay the amounts, and it may raise concerns with HMRC if funds appear to have been extracted improperly from the limited company bank account.
Pre-dividend checks
Before paying any dividend, directors must ensure the company has enough retained profits, and that they maintain proper documentation, such as board meeting minutes and dividend vouchers.
In addition, if you're working through a limited company and fall within IR35, most of your income should be taken as salary with the appropriate Income Tax and National Insurance deductions.
How HMRC may step in if inside IR35 contractors pay dividends
Paying dividends instead can lead HMRC to treat those payments as ‘disguised salary.’ This treatment by HMRC may result in backdated tax and NI liabilities, along with interest and penalties. To avoid these issues, it’s important to understand your IR35 status and handle income correctly.
Let’s now look a bit more at dividend frequency beyond the ‘sufficient retained profits’ rule as a key consideration.
No legal limit on dividend frequency
The truth is there’s no limit in law governing how often a limited company can issue dividends.
Many contractors operating as the sole director of their own Personal Service Company (PSC) choose to pay themselves a dividend (with salary) on a monthly basis, mainly to align with personal budgeting needs.
Monthly dividends aren’t automatically problematic, but…
However, while monthly dividends aren't automatically problematic, making distributions regularly, in fixed amounts, can start to resemble a ‘salary.’ It’s especially risky if the distribution is not supported by sufficient retained profits or proper documentation.
Such an approach to dividends could raise concerns under IR35, where HMRC looks for signs of ‘disguised employment.’
Four director must-dos for HMRC-compliant dividends
To stay HMRC-compliant, directors must ensure each dividend is:
- based on actual available profit;
- properly declared with board meeting minutes;
- properly evidenced with a dividend voucher;
- variable in its amount -- where appropriate.
In short, when it comes to dividend frequency, regularity alone isn’t an IR35 red flag — but combined with other employment-like indicators, it could contribute to HMRC scrutiny.
And finally, dividend taxation/rates in 2025-26 are set, but beware potential changes in 2026-27
While the dividend landscape for limited company directors remains favourable for the 2025/26 tax year, potential dividend changes on the horizon mean it’s more important than ever to stay informed and proactive.
Dividends continue to offer a tax-efficient way to extract income from your limited company -- but only when used in line with HMRC rules, and in line with the ‘frequency’ considerations outlined above.
By combining a well-structured salary with strategic dividend planning, while staying aware of dividend frequency and thresholds, contractors can continue to make the most of their income. As always in our view, though, personalised advice from your accountant is key to ensuring your remuneration strategy is both compliant and optimised for your circumstances.
