What are alphabet shares, and can a family company use them to pay different dividends?

Alphabet shares are separate classes of ordinary shares in the same company, usually called A, B and C shares, which allow the company to declare a different dividend on each class. They let shareholders in one company take different amounts, but HMRC can still treat unequal dividends as a settlement under ITTOIA 2005 and tax them on someone else, so the structure needs a commercial reason and a careful dividend pattern.

Why a company needs them to pay unequal dividends

Under company law a dividend is paid at the same rate on every share in a class. Two people who own the same class of ordinary share get the same amount per share, whatever they would prefer.

A company that wants one shareholder to take more than their shareholding suggests has two ways to do it. A shareholder can waive a dividend, or the shares can be divided into classes. Classes are the tidier route, and practitioners generally regard them as less likely to be challenged than a waiver.

How they work

A husband and wife each hold 50 shares. The company reorganises so that the husband holds 50 A shares and the wife 50 B shares. Both classes carry the same votes and the same rights to capital. The directors can then declare a dividend on the A shares one year and the B shares the next, or different amounts on each.

The arrangement only pays if each shareholder has personal allowances and tax bands to use. It does nothing for someone who is already a higher-rate taxpayer on other income.

Where HMRC looks

HMRC treats unequal dividends on separate classes in much the same way as dividend waivers. Its manual (TSEM4225, Example 13) uses spouses who hold equally ranking A and B shares in a company that has made £25,000 of profit. The directors vote a £20,000 dividend on the B shares and nothing on the A shares. HMRC says the B dividend could only be paid because nothing was declared on the A shares. It treats that as a bounteous arrangement and attributes £16,000 of the dividend to the A shareholder.

As with waivers, the exemption for gifts between spouses is no help, because nothing has been gifted. Commentators writing in 2026 make the same point: alphabet shares are caught by the settlements legislation in much the same way.

The warning signs

HMRC's manual lists the factors that make it more likely to apply the rules to a waiver. They carry across to classes of shares.

• The company could not have paid the same dividend on every share out of its retained profits.
• It happens year after year.
• The shareholder who receives more is someone the other would naturally want to benefit, such as a spouse.
• The recipient pays less tax on the dividend than the shareholder who gets nothing.

What lowers the risk

• Set the classes up at the start, or for a genuine commercial reason, and keep the rights to votes and capital identical.
• Check the company has enough retained profits to pay the same rate on every class, so no class is left empty to make room for another.
• Pay something on each class in most years rather than leaving one class at nil.
• Pay each dividend into the recipient's own bank account.
• Give each shareholder a real role in the business.
• Keep minutes that record why each dividend was declared.

These are habits practitioners use, not a guarantee. HMRC's manual does not say any of them makes an arrangement safe.

Simpler alternatives

If the aim is to use a spouse's allowances, gifting them ordinary shares outright is usually safer than alphabet shares, because the exemption for outright gifts protects it. See our page on spousal dividends. You can also leave profits in the company, pay pension contributions from it, or pay a real salary to a spouse who does real work.

Where one shareholder simply wants to waive a dividend, read our page on dividend waivers between spouses first.

Other uses

Companies also use classes of shares for employees, adult children and outside investors. Where shares go to someone because they work for the company, the employment-related securities rules can bring an income tax charge on their value. That needs separate advice.

Sources: HMRC manual TSEM4225: dividend waivers and settlements · Tax Insider: alphabet shares v dividend waivers · HMRC manual TSEM4205: outright gifts between spouses