Alphabet Shares vs Declaring Different Dividends: Which Is the Safer Approach?

Alphabet shares in a limited company UK structure are the lawful way to pay different dividends to different shareholders, whereas simply declaring different dividends on one class of shares is not permitted. Under company law, dividends must be paid in proportion to the shares held within each class, so flexibility has to be built into the share structure before the dividend is declared. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, is regularly asked which route is safer for family-owned companies. This article compares alphabet shares with the alternatives, including dividend waivers, using 2026/27 dividend rates. It explains how flexible dividend shares work, where HMRC's settlements legislation creates risk, and which structures hold up best. A worked example shows what a spouse shareholder with unused allowances could save, and what happens if the arrangement is challenged.

Key Takeaways

• Alphabet shares are separate classes of ordinary shares, such as A and B, that allow the board to declare a different dividend per share on each class.
• Declaring different dividends on a single class of shares is invalid, because dividends must be paid pro rata to shareholdings within that class.
• Dividend tax in 2026/27 is 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers, with a £500 dividend allowance.
• Shares given to a spouse or civil partner are generally outside the settlements rules if they carry full capital, voting and income rights and are not wholly or substantially a right to income.
• Dividends to minor unmarried children from shares given by a parent are taxed on the parent once they exceed £100 a year.
• Every dividend needs sufficient distributable reserves, board minutes and a dividend voucher, whichever share structure is used.

What are alphabet shares and how do they work?

Alphabet shares are different classes of ordinary shares, usually labelled A, B, C and so on, that carry identical rights except for dividends, so each class can receive a different dividend per share. The company's articles of association must allow it, and a share rights alteration may be needed first.

A typical family company with two directors, each holding one class, can then pay a higher dividend to one shareholder in a year without paying the same rate per share to the other. Each class still votes and shares in capital in the same way.

Our guide to alphabet shares and flexible dividend planning covers the set-up steps in full. The practical point is that the flexibility must be created at the share structure level, with the right documents, and cannot be improvised when dividends are declared.

Why can't a company just declare different dividends?

A company cannot lawfully declare different dividends per share to shareholders within the same class, because the Companies Act and most articles require dividends to be paid pro rata. A dividend paid to one holder of ordinary shares but not another is an unlawful distribution that can be reclaimed.

Many owners assume the board can decide who is paid. That assumption creates problems that surface years later, often when HMRC reviews dividend vouchers or when a shareholder falls out with the others. Unlawful dividends may also be treated as director loans, with consequences under Section 455, which for 2026/27 is charged at 35.75% on overdrawn balances.

Declaring different dividends is therefore not a safer alternative to alphabet shares. It is a different and weaker route that only works if share classes, or a valid waiver, are already in place.

Are dividend waivers a safer alternative?

A dividend waiver is a formal deed in which a shareholder gives up a dividend before it becomes payable, and it is generally less robust than separate share classes. Waivers must be executed before the right to the dividend arises, signed as a deed, and must not be selective in a way that breaches the articles.

A waiver is also visible to HMRC as a deliberate arrangement to move income. Where the waived dividend is redirected to a spouse, HMRC may argue that the settlements legislation applies. Waivers also need repeating every time and carry a paperwork burden that grows with each dividend round.

Alphabet shares have the advantage of being documented once in the articles and share register. For regular flexible payments, they are normally the cleaner approach. Waivers can suit a one-off situation, but for ongoing family company dividend planning they are rarely the recommended default.

What is the settlements legislation risk with alphabet shares?

The settlements legislation in Part 5, Chapter 5 of ITTOIA 2005 allows HMRC to tax income on the person who made a settlement, rather than the person receiving it. Following the House of Lords decision in Jones v Garnett, the so-called Arctic Systems case, spouses are protected where they hold ordinary shares with full rights, and the gift is not wholly or substantially a right to income.

Risk rises sharply in three situations. First, shares with only dividend rights and no votes or capital rights look like an income gift. Second, shares gifted to a minor child fall under the parental settlement rule, taxing the parent on dividends above £100 a year. Third, a spouse who receives dividends but does not genuinely own the shares is open to challenge.

For a detailed look, read HMRC's settlements legislation and the risk with alphabet share structures. A shareholder who holds real equity, votes and capital rights is the safest position.

How much can alphabet shares save? A worked example

Consider a company paying £40,000 in dividends to Alice, who already earns a £50,270 salary, and her husband Ben, who has no other income and holds B shares. If all £40,000 goes to Alice, she pays tax at 35.75% after the £500 dividend allowance: £39,500 at 35.75% is £14,121.25.

If the company pays all £40,000 to Ben on his B shares, his personal allowance of £12,570 covers part of the dividend. The £500 allowance covers more, leaving £26,930 taxable at 10.75%, which is £2,894.98. The saving is about £11,226.

If the shares were instead split 50:50 under one class, each would receive £20,000. Alice would pay £6,971.25, Ben £744.98, and the total would be £7,716.23. Alphabet shares therefore saved a further £4,821 compared with equal ownership.

This only holds if Ben genuinely owns the shares, the dividend is properly declared, and Ben is free to spend the money. See our guide to spouse shareholders and alphabet shares for the safeguards.

How do you set up a safe alphabet share structure?

A safe alphabet share structure needs full-rights shares, correct articles, genuine ownership, and proper dividend documentation each time. These steps usually apply before any dividend is declared.

1. Check the articles allow different classes and dividend rights.
2. Issue or reclassify shares so each class carries the same capital and voting rights.
3. Make sure each shareholder is a real owner with full beneficial entitlement.
4. Confirm distributable reserves before every dividend.
5. Hold board minutes and issue a dividend voucher per shareholder.

Review the structure annually. The dividend allowance of £500 and the 10.75% basic rate in 2026/27 change how much value each shareholder can receive tax-efficiently, and the dividend allowance guide explains the thresholds. Anything unusual, such as shares for children or trusts, needs advice first.

Frequently Asked Questions

Can a limited company pay different dividends to different shareholders?

Yes, but only if the shareholders hold different classes of shares. A company cannot pay different dividends per share on a single class, because dividends must be paid pro rata. Alphabet shares create separate classes, such as A and B shares, so the board can declare a different dividend on each class.

Are alphabet shares legal in the UK?

Yes, alphabet shares are legal when the articles allow different share classes and dividends are properly declared from distributable reserves. They are widely used in family companies. The tax risk lies in how HMRC applies the settlements legislation, not in the legality of the shares themselves.

What is the dividend tax rate in 2026/27?

The dividend tax rates for 2026/27 are 10.75% for basic-rate taxpayers, 35.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers. The dividend allowance is £500. The ordinary and upper rates rose from 6 April 2026, having previously been 8.75% and 33.75%, so dividend planning matters more than it did in 2025/26.

Can I give shares to my spouse to save tax?

Yes, and gifts of shares between spouses and civil partners are generally outside the settlements rules if the shares carry full capital, voting and income rights. The gift must be genuine and unconditional. Shares that are wholly or substantially a right to income are at greater risk of challenge by HMRC.

Can children hold alphabet shares?

Children can hold shares, but dividends paid to a minor unmarried child from shares given by a parent are taxed on the parent if they exceed £100 a year. This parental settlement rule makes alphabet shares for young children largely ineffective for tax saving. Advice is needed before issuing any.

How Blue Tick Can Help

Blue Tick Accountants advises family-owned limited companies on share structures, dividend planning and the settlements legislation, including how to document alphabet shares so they stand up to an HMRC enquiry. A review of your articles, shareholders and reserves can show whether flexible dividends will genuinely save tax in your position. Head to our website and book a meeting now.

Which approach is safer for a family company?

Alphabet shares with full rights, held by genuine owners, are the safer route for flexible dividends, because simply declaring different dividends is invalid and waivers carry more risk. With 2026/27 dividend rates of 10.75% and 35.75%, the difference between the right and wrong allocation can run into thousands of pounds. Before the next dividend round, check your articles, confirm your shareholders hold full rights, and keep the minutes and vouchers in order so the arrangement can be defended if questioned.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, who advises limited company owners, landlords and the self-employed across the UK on dividend planning and company structures. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.