A company has more than one class of shares whenever the rights attached to its shares are not all identical. Ordinary shares usually carry votes, dividends and a share of capital; preference shares rank ahead for a fixed dividend or a return of capital; non voting shares give an economic stake without control; and alphabet shares let a company pay different dividends to different groups of holders. Each class must be set out in the articles or terms of issue and shown on the statement of capital, and the design has to work for tax as well as company law.
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What makes shares a separate class?
Section 629 of the Companies Act 2006 says shares are of one class if the rights attached to them are in all respects uniform. Any difference, however small, creates a new class. The only exception is that shares do not become a different class merely because they do not carry the same dividend rights in the 12 months after allotment.
The rights come from the articles and the terms on which the shares were issued. Under article 22 of the model articles for private companies, a company may issue shares with such rights or restrictions as are decided by ordinary resolution, and may issue redeemable shares. Many companies have bespoke articles that set each class out in full.
Whenever a statement of capital is filed, article 2 of the Companies (Shares and Share Capital) Order 2009 requires, for each class, particulars of voting rights (including rights that arise only in certain circumstances), dividend rights, capital rights including on a winding up, and whether the shares are redeemable.
How do the main types differ?
| Type | Typical rights | Common reason for using it |
|---|---|---|
| Ordinary | One vote per share, dividends as declared, share of surplus capital | The default equity of the company |
| Preference | Fixed dividend paid before ordinary dividends, often priority for capital, often no vote | Investor or family funding with a predictable return |
| Non voting ordinary | Dividends and capital, no votes | Giving family or staff value without control |
| Alphabet (A, B, C ordinary) | Usually identical except that dividends can be declared on each class separately | Paying different dividends to different holders |
| Redeemable | Can be bought back on set terms | Exit route for an investor or retiring shareholder |
| Deferred | Little or no right to income or capital until others are paid | Neutralising shares on a reorganisation |
The labels are only shorthand. What counts is the wording of the rights, which is why the articles should be read before any dividend is declared.
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Why use preference shares?
Preference shares give a holder priority. Article 30 of the model articles stops a company paying interim dividends on shares with deferred or non preferred rights while any preferential dividend is in arrear, and lets the directors pay fixed rate dividends at intervals if profits justify it. Redeemable preference shares are common, but under section 684 a company cannot issue redeemable shares unless it also has shares in issue that are not redeemable.
Two points need care. First, depending on their terms, preference shares may be shown as a liability rather than equity in the accounts; see our guide on classifying preference shares. Second, section 1119 of the Corporation Tax Act 2010 excludes from “ordinary share capital” shares that carry only a right to a fixed rate dividend and no other right to profits. Those shares do not count towards the 5% ordinary share capital test for Business Asset Disposal Relief in section 169S(3) of the Taxation of Chargeable Gains Act 1992.
Why use non voting shares, and where do they go wrong?
Non voting shares let owners share value without sharing control, for example with a spouse, adult children or key staff. The catch is tax. Section 169S(3) also requires at least 5% of the voting rights by virtue of the holding, so someone holding only non voting shares cannot meet the personal company test for Business Asset Disposal Relief.
The settlements legislation can also apply. Section 626 of the Income Tax (Trading and Other Income) Act 2005 exempts outright gifts between spouses or civil partners, but not where the property is wholly or substantially a right to income. HMRC’s Trusts, Settlements and Estates Manual at TSEM4205 gives the example of B shares with no votes and no rights to assets on a winding up, given by two owners to their wives; relying on Young v Pearce, HMRC treats the dividends as the husbands’ income. By contrast, a gift of ordinary shares carrying capital rights was outside the rules in Jones v Garnett.
How do alphabet shares work, and what does HMRC look for?
Alphabet shares are separate classes of ordinary shares, often identical except that the articles allow dividends to be declared on one class without the others. Model article 30(3) says no dividend may be paid except in accordance with shareholders’ respective rights, so the articles must clearly permit different dividends per class. Without that wording a dividend on one class alone may be unlawful; see our guide on paying dividends legally.
TSEM4325 lists factors that point HMRC towards a settlement, including differing classes of shares that enable dividends to be paid only to shareholders paying lower rates of tax, dividends paid only on certain classes, and shares given away or subscribed at par that carry only restricted rights. The same thinking applies to dividend waivers and to family investment companies.
How do you create a new class or change the rights?
- Articles. If the existing articles do not provide for the class, amend them by special resolution under section 21.
- Authority to allot. Section 550 lets directors of a private company with only one class allot further shares of that class. Once there are two classes it no longer applies, so the directors need authority under section 551, as explained in allotting shares.
- Filings. File a return of allotment (form SH01) with a statement of capital within one month under section 555. If the class is given a new name or designation, notify Companies House within one month under section 636 (form SH08).
- Varying existing rights. Under section 630, class rights can be varied only as the articles allow or, if they are silent, with written consent from holders of three quarters in nominal value of the class or a special resolution at a separate class meeting. Holders of at least 15% of the class who did not consent can apply to court within 21 days under section 633. The variation must be notified within one month under section 637 (form SH10).
How does this work in practice?
Illustration only. A founder owns all 100 ordinary shares. She wants her husband to share in income and a long serving manager to share in growth.
- The articles are amended to create A ordinary (her existing shares, redesignated), B ordinary and C non voting ordinary shares, with dividends declarable on each class separately.
- Her husband subscribes for 50 B ordinary shares with full voting and capital rights. Because his shares carry capital as well as income, the position is closer to Jones v Garnett than to the B shares in TSEM4205.
- The manager gets 10 C non voting shares. He has an economic stake but, without 5% of the votes, will not qualify for Business Asset Disposal Relief on those shares. Because the opportunity arises from his employment, Part 7 of the Income Tax (Earnings and Pensions) Act 2003 also applies; see employment related securities.
- The company files SH01 with the statement of capital, SH08 for the new designations and the special resolution.
What mistakes come up most often?
- Declaring different dividends on classes whose articles give identical rights to dividends.
- Creating a second class and then relying on section 550 for later allotments.
- Giving a spouse shares with income rights only, which TSEM4205 shows is likely to fail.
- Assuming non voting or fixed rate preference shares count towards Business Asset Disposal Relief.
- Varying rights without the class consent required by section 630, or not filing SH10.
- Issuing only redeemable shares, which section 684(4) prohibits.
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Related Accountapedia entries
- Alphabet shares and dividend flexibility
- Non voting shares: how they work
- Cumulative preference dividends and arrears
- Can you pay different dividends on the same share class
- Deferred shares: what they are and why they are used
- Can you ask for a different HMRC officer
Sources
- legislation.gov.uk: Act 2006 c. 46, section 629
- legislation.gov.uk: SI 2008/3229, schedule 1
- legislation.gov.uk: SI 2008/3229, schedule 1
- legislation.gov.uk: SI 2009/388, article 2
- legislation.gov.uk: Act 2006 c. 46, section 684
- legislation.gov.uk: Act 2010 c. 4, section 1119
- legislation.gov.uk: Act 1992 c. 12, section 169S
- GOV.UK: Manual page TSEM4205
- GOV.UK: Manual page TSEM4325
- legislation.gov.uk: Act 2006 c. 46, section 21
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.