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HMRC internal manual

National Insurance Manual

Class 1 NICs: Earnings of employees and office holders: Dividends

Companies pay dividends to shareholders as members of that company.  Normally, a company declares dividends annually at the Annual General Meeting (AGM). The dividend may be derived from both:


  • capital profits (profits from investments); and
  • profits from trading.

Shareholders may receive interim dividend payments between AGMs in anticipation of the final declaration. You should treat interim dividends exactly as final dividends.

Dividends are derived from a shareholding and not employment. They cannot therefore be classed as earnings and do not attract NICs.

For dividends to be lawful they must meet two conditions:

  • the company must have sufficient profits to finance the dividend; and
  • the dividends paid to shareholders, or to a particular class of shareholder, must be paid according to the rights laid down in the Articles of Association for that type of shareholding.

The onus is on the employer to show that dividends meet the conditions. However, even if the dividends do not meet these conditions, this is a matter which can only be taken up by the shareholders themselves under company law. There is no action open to you under social security legislation. The fact that a dividend has not met the requirements of company law does not make it earnings for NICs purposes.

To decide whether a dividend is genuine rather than a disguised payment of earnings, you need to see :

  • the Memorandum and Articles of Association
  • the Minutes of the meeting at which the dividend declaration was made; and
  • the profit and loss account/balance sheet for the years in question.

For further information on dividends, see CT1520 and CT2007a.