Definition
A dividend is a distribution of profit from a company to its shareholders. It is paid most commonly in cash but can also be paid in additional shares (a scrip dividend) or other property (a distribution in specie). On the company’s books, a dividend is debited to retained earnings and credited to cash (or share capital for a scrip dividend). On the recipient’s side, the dividend is taxable income under each jurisdiction’s specific dividend tax regime, with varying degrees of franking or imputation credit to avoid double taxation.
What a dividend means in practice
For a bookkeeper, dividends are routine in owner-managed companies and rare in early-stage growth businesses (which typically retain earnings to fund growth). The accounting entry is simple: on the date the dividend is declared, debit retained earnings, credit dividend payable (a current liability). On the date of payment, debit dividend payable, credit cash. The dividend reduces retained earnings on the statement of changes in equity and is reported on the company’s annual return and (in most jurisdictions) to the tax authority.
The tax efficiency of dividends versus salary is the most common topic in owner-managed-company tax planning. In the UK, dividends carry no national insurance, which makes a mix of low salary plus dividend more tax-efficient than salary alone for most owner-managers (the optimal mix changes when income tax thresholds, NI rates, or dividend rates change). In AU and NZ, franking and imputation credits avoid double taxation but the corporate-plus-personal rate is broadly the same as salary. In Singapore, the one-tier system means dividends are entirely free of personal tax.
A practical example: a UK consultancy with 100,000 of retained earnings declares a 25,000 interim dividend in November 2026, payable December 2026. On the declaration date: debit retained earnings 25,000, credit dividend payable 25,000. On the payment date: debit dividend payable 25,000, credit bank 25,000. Closing retained earnings: 75,000. The shareholder receives 25,000 of dividend income, the first 500 of which is tax-free under the 2026-27 dividend allowance, with the balance taxed at 8.75% to 39.35% depending on their other income.
How dividends work by country
United Kingdom
Personal tax in 2026-27: 0% on the first 500 of dividend income (the dividend allowance), then 8.75% in the basic-rate band, 33.75% in the higher-rate band, 39.35% in the additional-rate band. Dividends are paid out of post-tax profits; no franking credit is attached. Solvency test under Companies Act 2006 section 830 requires distributable profits (realised profits in retained earnings) before any dividend can be paid. Unlawful distributions are recoverable from the shareholders.
Australia
Personal tax: dividends carry franking credits equal to the company tax already paid on the underlying profits (at 30% or 25% depending on the company’s tax rate). Resident shareholders apply the franking credit to offset personal tax on the dividend; excess credits are refundable for low-rate taxpayers. Solvency test under Corporations Act 2001 section 254T: a dividend can only be paid if the company’s assets exceed its liabilities and the payment is fair and reasonable to shareholders as a whole.
Canada
Personal tax: eligible dividends (from corporate income taxed at the general rate) get the federal gross-up of 38% and a dividend tax credit of 15.0198% of the grossed-up amount, producing a combined corporate-plus-personal rate similar to interest income. Non-eligible dividends (from corporate income taxed at the small-business deduction rate) have a less generous gross-up and credit. Provincial dividend tax credits stack on top of the federal credit.
New Zealand
Personal tax: imputation credits attached up to the corporate tax already paid (28%). Shareholders apply imputation credits to offset personal tax. Excess credits are refundable up to the recipient’s personal tax liability. Companies Act 1993 section 4 solvency test applies before any distribution.
Singapore
Personal tax: 0%. Singapore operates a one-tier corporate tax system: corporate tax is final and shareholders pay no further personal tax on franked dividends. This is the simplest dividend tax regime among our five jurisdictions. Section 403 of the Companies Act prohibits dividends out of capital.
Related terms
A dividend reduces equity:
- Equity is the section of the balance sheet a dividend decreases.
- Retained earnings is the specific equity account debited.
- Retained profit is the UK synonym.
- Share capital is the other equity account (unaffected by a typical cash dividend).
- The statement of changes in equity shows the dividend movement.
- Net profit is the source of the retained earnings being distributed.
See also
For the equity section of the balance sheet that the dividend reduces, see the equity entry.
FAQ
See the answered questions above for UK distributable-profits rules, the 2026 UK dividend tax rates, and interim vs final dividends.