Alphabet shares for paying different dividends — how do they work?

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Alphabet shares for paying different dividends — how do they work?

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There are two directors in my limited company — me and a colleague — and we'd like to be able to take different dividend amounts depending on the year. A friend mentioned 'alphabet shares' as the way to do this, with A shares and B shares so dividends can be declared separately for each class.

How does this actually work in practice? Do we need to create new share classes through a special resolution and amend the articles, and does Companies House need to be told about it? Also, is there anything to watch out for, like making sure the paperwork is watertight so HMRC doesn't challenge the arrangement? We're both keen to keep things simple and above board, so any guidance on the proper process would be really welcome.

Tagsdividends alphabet shares share classes articles of association

Answer 1

DDasiy Smith

Alphabet shares are simply separate classes of ordinary shares — typically A and B — with identical rights except that dividends can be declared separately on each class, so each of you can take a different dividend without affecting the other.

In practice the process is:

1. Pass a special resolution to create the new share class(es) and amend your articles of association so each class carries its own dividend rights.

2. File the special resolution and the new articles with Companies House within 15 days, update the register of members, and issue new share certificates.

3. Each time you pay, hold a board meeting: confirm sufficient distributable profits, minute the dividend resolution per class, and issue dividend vouchers for each shareholder.

Two things to watch. First, dividends can only come from distributable profits — the company must have enough overall, whichever class you pay. Second, HMRC can challenge arrangements designed purely to divert income to a lower-rate taxpayer under the settlements legislation, so keep the paperwork watertight: genuine share rights, proper minutes, and dividend vouchers every time. An accountant can set the classes up cleanly — it's a routine job and well worth doing properly.

Alphabet shares for paying different dividends — how do they work?

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