Alphabet shares and dividend flexibility

Q: How does a dividend on different classes work in practice?

Illustration only. Hall Ltd has 100 A shares held by Sam and 100 B shares held by Sam's spouse, Jo. Both classes carry one vote per share and equal rights to capital. Jo works in the business part time. The company has distributable reserves of £60,000. The board declares an interim dividend of £300 per A share and £100 per B share, so Sam receives £30,000 and Jo receives £10,000. The board minute records the distributable reserves figure, the separate rate for each class and the payment date. Separate dividend vouchers are issued to each holder. Because Jo's B shares were subscribed for by Jo, carry full capital rights and the company owns real assets, this is the kind of fact pattern HMRC describes as outside the settlements rules. The tax each person pays then depends on their own income and the dividend allowance and rates for the year.

Q: What are the company law risks?

Breach of directors' duties. Section 171 requires directors to act in accordance with the constitution and to use powers only for the purposes for which they were conferred. Using a dividend discretion simply to starve one class held by an estranged shareholder is open to challenge. Unfair prejudice. Under section 994 a member can petition the court where the company's affairs are conducted in a way that is unfairly prejudicial to some part of the members. Minority holders of a class that never receives a dividend are the obvious claimants; see unfair prejudice petitions. Unlawful distributions. Section 830 allows distributions only out of profits available for the purpose. A dividend on any one class that exceeds distributable profits is unlawful whatever the articles say, with the consequences described in unlawful dividends. Divorce and exits. A spouse or child holding a class with full rights owns those shares outright. If the relationship ends, they keep the shares unless the articles or a shareholders' agreement provide for a transfer.

Alphabet shares are separate classes of ordinary share (often called A, B, C and so on) that let a company declare a different dividend on each class, so profits can be shared in a way that does not follow the size of each shareholding. The structure is lawful if the articles allow it and the paperwork is right, but HMRC can use the settlements legislation to tax the dividend on the person who gave the shares away, and minority holders can challenge decisions that treat them unfairly.

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What exactly are alphabet shares?

Under section 629 of the Companies Act 2006, shares are of one class only if the rights attached to them are uniform in every respect. If the articles say that the directors may declare a dividend on the A ordinary shares without declaring one on the B ordinary shares, the two sets of shares carry different rights and are therefore separate classes, even if they have identical voting and capital rights.

That is the whole mechanism. A family company might issue A shares to the founder, B shares to a spouse and C shares to an adult child. Each year the board decides a separate rate per share for each class, so one shareholder can receive a larger dividend than another without anyone having to sign a dividend waiver.

The flexibility is real, but it does not change the basic rules. Every dividend, on every class, still has to be paid out of distributable profits, approved properly and recorded, as explained in how to pay dividends legally.

What do the articles need to say?

A company using the Model Articles for private companies limited by shares can issue shares with different rights, because article 22 allows the company to issue shares “with such rights or restrictions as may be determined by ordinary resolution”. However, article 30(3) says no dividend may be declared or paid unless it is in accordance with shareholders’ respective rights. Unamended model articles do not spell out that each class can receive a different rate, so most advisers adopt bespoke articles that state expressly:

that each class ranks equally in all respects except dividend entitlement;
that the directors (or the members by ordinary resolution) may declare a dividend on one class without declaring one on another, or at different rates;
how voting, capital on a winding up and transfers work for each class.

Amending the articles needs a special resolution under section 21. A copy of the amended articles must reach Companies House within 15 days of the amendment taking effect (section 26), and a copy of the special resolution must also be filed within 15 days (section 30).

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How are the new classes created and recorded?

There are two common routes. New shares can be allotted as a separate class, which needs the directors to have authority and needs any pre emption rights dealt with, as covered in allotting shares. A return of allotment must be filed within one month with a statement of capital that gives, for each class, prescribed particulars of the rights attached (section 555). Alternatively, existing ordinary shares can be redesignated into new classes. If that changes the rights attached to any existing class, it is a variation of class rights, which needs the procedure in the articles or, if there is none, written consent from holders of at least three quarters in nominal value of that class or a special resolution of that class (section 630). Notice of the variation must be given to Companies House within one month (section 637).

The register of members must distinguish each holding by class where there is more than one class (section 113(3)), and every dividend should be minuted separately for each class.

How does a dividend on different classes work in practice?

Illustration only. Hall Ltd has 100 A shares held by Sam and 100 B shares held by Sam’s spouse, Jo. Both classes carry one vote per share and equal rights to capital. Jo works in the business part time. The company has distributable reserves of £60,000. The board declares an interim dividend of £300 per A share and £100 per B share, so Sam receives £30,000 and Jo receives £10,000.

The board minute records the distributable reserves figure, the separate rate for each class and the payment date. Separate dividend vouchers are issued to each holder. Because Jo’s B shares were subscribed for by Jo, carry full capital rights and the company owns real assets, this is the kind of fact pattern HMRC describes as outside the settlements rules. The tax each person pays then depends on their own income and the dividend allowance and rates for the year.

When does HMRC treat the dividend as someone else’s income?

The main tax risk is Chapter 5 of Part 5 of the Income Tax (Trading and Other Income) Act 2005. “Settlement” is defined in section 620 to include any disposition, arrangement or transfer of assets, so a gift of shares or an arrangement over dividends can be a settlement even though no trust exists. Under section 624, income arising under a settlement from property in which the settlor has an interest is taxed as the settlor’s income. Section 625 treats the settlor as having an interest if the property can benefit the settlor or the settlor’s spouse or civil partner.

There is an exception in section 626 for an outright gift between spouses or civil partners, but only if the gift carries a right to the whole of the income and the property is not “wholly or substantially a right to income”. HMRC’s Trusts, Settlements and Estates Manual at TSEM4205 gives the example (based on Young v Pearce) of non voting B shares with no right to assets on a winding up issued to wives: the dividends were taxed on the husbands. By contrast, the same page explains that in Jones v Garnett (the Arctic Systems case) a gift of ordinary shares with capital rights fell within the exception.

TSEM4325 lists “differing classes of shares enabling dividends to be paid only to shareholders paying lower rates of tax” as one of the factors HMRC looks for. Section 629 separately taxes the settlor on income paid to their own unmarried minor child under a settlement, unless the child’s total income of that kind is £100 or less in the tax year, so giving alphabet shares to a child under 18 rarely achieves anything; see the parental settlements rule.

What are the company law risks?

Breach of directors’ duties. Section 171 requires directors to act in accordance with the constitution and to use powers only for the purposes for which they were conferred. Using a dividend discretion simply to starve one class held by an estranged shareholder is open to challenge.
Unfair prejudice. Under section 994 a member can petition the court where the company’s affairs are conducted in a way that is unfairly prejudicial to some part of the members. Minority holders of a class that never receives a dividend are the obvious claimants; see unfair prejudice petitions.
Unlawful distributions. Section 830 allows distributions only out of profits available for the purpose. A dividend on any one class that exceeds distributable profits is unlawful whatever the articles say, with the consequences described in unlawful dividends.
Divorce and exits. A spouse or child holding a class with full rights owns those shares outright. If the relationship ends, they keep the shares unless the articles or a shareholders’ agreement provide for a transfer.

What mistakes come up most often?

Declaring different rates on classes the articles do not actually separate, so that the dividend breaches article 30(3) or equivalent wording.
Creating classes with no capital rights or no votes for a spouse, which takes the arrangement outside the section 626 exception.
Issuing shares to minor children and expecting the dividends to use the child’s allowances.
Forgetting the filings: special resolution, amended articles, return of allotment with a statement of capital, or notice of a variation of rights.
Writing one combined board minute and one voucher that do not show the separate rate per class.
Treating the dividend decision as a tax calculation only, with no regard to whether a minority holder could say the pattern of dividends is unfairly prejudicial.

Are alphabet shares better than a dividend waiver?

Both aim at the same result, and HMRC lists both in TSEM4325 as arrangements it examines. At TSEM4220 HMRC says a shareholder who waives a dividend so that others receive more has indirectly provided funds for a settlement, and that section 624 or 629 applies where the person benefiting is the waiving shareholder’s spouse or minor child. Alphabet shares avoid repeated waivers, but they create a permanent class structure that has to be maintained in the articles, the register and the confirmation statement. Neither route protects against the settlements legislation where the underlying arrangement is a gift of income to a spouse or minor child. The safer arrangements are those where each shareholder has subscribed real money or contributes real work, and holds shares with genuine capital and voting rights.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.