Family Company Dividend Planning: Allocating Profits with Alphabet Shares in a UK Limited Company

Alphabet shares let a family limited company pay different dividends to different shareholders from the same profits, and in 2026/27 the structure can cut a household's dividend tax by several thousand pounds when each shareholder owns their shares outright. Alphabet shares in a limited company work by splitting the ordinary share capital into separate classes, usually labelled A, B and C, so the directors can declare a dividend on one class without paying the same amount on the others. For family company dividend planning that flexibility matters more than it used to, because dividend tax rates rose on 6 April 2026 to 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers, which widens the gap between a basic rate and a higher rate shareholder. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, explains below how the structure works, a worked example with real figures, where HMRC's settlements legislation can undo the benefit, and how to set it up safely.

Key Takeaways

• Alphabet shares are separate classes of ordinary share in one company, which allow the directors to declare a dividend on one class without paying the same amount on the others.
• Dividend tax rates for 2026/27 are 10.75% (ordinary), 35.75% (upper) and 39.35% (additional), and every individual has a £500 dividend allowance.
• Moving £30,000 of a £60,000 dividend from a higher rate director to a spouse with no other income cuts the household's 2026/27 dividend tax from £11,971.25 to £4,991.23, a saving of £6,980.02.
• Outright gifts of shares between spouses and civil partners are generally exempt from the settlements legislation, but shares carrying only a right to income are not protected.
• Dividends from shares given by a parent to an unmarried child under 18 are taxed on the parent once they exceed £100 a year.
• A company can only pay dividends from distributable profits, and each dividend needs board minutes and a voucher recording the class and amount.

What are alphabet shares and how do they work in a limited company?

Alphabet shares are different classes of ordinary share, typically named A, B and C, that carry the same voting and capital rights but can each receive a different dividend. A company with two shareholders might give one director A shares and a spouse B shares, then declare a dividend of £40,000 on the A shares and £20,000 on the B shares in the same month. Without separate classes, a dividend must normally be paid in proportion to shareholdings, so a 50/50 company would have to pay equal amounts.

The standard model articles of association generally require dividends to follow shareholdings, so the articles usually need to be amended before the classes are created. The company then passes the resolutions, files the relevant Companies House forms and updates its statutory registers. Dividends can only be paid out of distributable profits under the Companies Act 2006, so alphabet shares allocate profit that already exists; they do not create it. Our complete guide to alphabet shares covers the mechanics in more depth.

How much tax can family company dividend planning save in 2026/27?

Moving dividends to a family shareholder on a lower tax band saves tax because that person's own allowances and 10.75% rate replace the 35.75% upper rate. Take a company with £60,000 of distributable profit after corporation tax, owned by a director who draws a £12,570 salary and a spouse with no other income.

If the company pays all £60,000 to the director, the whole amount is taxable dividend income. The first £500 is taxed at 0%, the next £37,200 at 10.75% (£3,999.00) and the remaining £22,300 at 35.75% (£7,972.25). The total is £11,971.25.

If A shares pay the director £30,000 and B shares pay the spouse £30,000, the director pays £3,171.25 (£29,500 at 10.75% after the £500 allowance). The spouse's £12,570 personal allowance and £500 dividend allowance cover the first £13,070, leaving £16,930 taxed at 10.75%, which is £1,819.98. The household total is £4,991.23, a saving of £6,980.02. The figures ignore student loans, other income and the effect of the personal allowance taper, and they work only if the spouse genuinely owns the shares.

What is the settlements legislation risk with alphabet shares?

HMRC's settlements legislation can tax dividends on the person who gave the shares away instead of the person who received them. The rules sit in sections 619 to 648 of the Income Tax (Trading and Other Income) Act 2005, with section 624 as the main charging provision. They apply where an arrangement involves a gift ("bounty") and the donor keeps a stake in the income.

The leading case is Jones v Garnett (the Arctic Systems case), where the House of Lords decided in 2007 that a husband-and-wife company escaped the rules because of the spouse exemption. Section 626 exempts outright gifts between spouses and civil partners, unless the gift is wholly or substantially a right to income, for example shares with no votes and no capital rights, or where the money flows straight back to the donor.

The practical safeguards are simple: the shares must carry real capital and voting rights, the shareholder must receive and control the dividends, and the donor must not retain a benefit. Our article on HMRC's settlements legislation walks through these tests in detail.

Which family members can hold alphabet shares safely?

A spouse or civil partner is the safest family shareholder, because the section 626 exemption covers outright gifts between them. They do not have to work in the business, although dividends must still be declared in line with the rights attached to their class. This route is covered in bringing a spouse in as a shareholder.

Adult children are different. The spouse exemption does not apply, so an outright gift of shares must be genuine, with the child entitled to spend the dividends, and each case needs advice. Minor children are the most restricted: under section 629, dividends from shares a parent has given an unmarried child under 18 are taxed on that parent once they exceed £100 a year, so alphabet shares rarely work for them. Gifts of shares to anyone other than a spouse are also treated as disposals at market value for capital gains tax, which can create a tax charge on a valuable company.

Before choosing a structure, compare it with the other ways to extract profit from your company, because a salary or pension contribution may suit some families better.

Frequently Asked Questions

What are alphabet shares in a limited company?

Alphabet shares are separate classes of ordinary share, usually labelled A, B and C, issued by the same company. Each class can receive a different dividend, so the directors can pay one family shareholder without paying the others. The classes normally carry identical voting and capital rights, and the articles of association must allow the arrangement.

Are alphabet shares legal in the UK?

Alphabet shares are legal in the UK and are widely used in family companies. The tax risk lies in HMRC's settlements legislation, not in the share structure itself. Outright gifts of shares between spouses and civil partners are generally exempt, provided the shares carry genuine capital and voting rights rather than a bare right to income.

Can I pay dividends to a spouse who does not work in my company?

A spouse who owns shares outright can receive dividends without working in the company. The spouse exemption in section 626 of ITTOIA 2005 protects outright gifts between spouses and civil partners. The exemption fails where the gift is wholly or substantially a right to income, or where the donor keeps control of the money.

How much dividend tax does a spouse pay on £30,000 of dividends in 2026/27?

A spouse with no other income pays £1,819.98 of dividend tax on £30,000 of dividends in 2026/27. The £12,570 personal allowance and £500 dividend allowance cover the first £13,070, and the remaining £16,930 is taxed at the 10.75% ordinary dividend rate.

Can children hold alphabet shares?

Children can hold shares, but dividends from shares given by a parent are taxed on the parent if they exceed £100 a year for each parent, while the child is under 18 and unmarried. The £100 limit applies per parent, per child, so alphabet shares rarely work for minor children.

How Blue Tick Can Help

Blue Tick Accountants advises family-owned limited companies on share structures, dividend allocation and settlements legislation risk, including drafting the resolutions and dividend paperwork that support the arrangement. Blue Tick models each shareholder's 2026/27 tax position before any shares are issued, so the saving is proven before you commit. Head to our website and book a meeting now.

Conclusion

Alphabet shares can move thousands of pounds of dividend tax out of the 35.75% band and into each family member's own allowances, but only when every shareholder owns their shares outright and receives the dividends in full. Check the articles of association, record each dividend properly and confirm the position against the settlements rules before the first payment. Taking advice before issuing the shares is far cheaper than defending an HMRC enquiry afterwards.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps landlords, limited company owners and the self-employed across the UK. 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.

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