Alphabet Shares Explained: Tax Benefits of Flexible Share Classes

Alphabet shares give a company more control over how it distributes profits. By creating separate share classes, such as A and B ordinary shares, the company can pay different dividends to different groups of shareholders.

That flexibility can support tax planning, but it does not override the tax rules. This guide explains how alphabet shares work, where they can help and what company owners should check before changing their share structure. Tax figures apply to 2026/27.

What Are Alphabet Shares?

Alphabet shares are not a separate legal type of share. The term simply describes different classes of shares labelled with letters, such as A, B and C.

A company can decide what each class carries. Class rights typically cover:

• Dividends
• Voting
• The return of capital if the company winds up

A simple structure might give each of two founders a separate class with otherwise identical rights. The directors can then consider dividends on each class separately, provided the company’s articles and share rights allow it.

How Dividend Flexibility Works

With a single class, dividends usually follow the number of shares each person holds. With alphabet shares, the company can declare a dividend on one class without paying the same amount per share on another, if the rights attached to the shares permit this.

This can suit companies where:

• Shareholders want income at different times
• Owners contribute different amounts of work or capital in different years
• Employees or family members hold shares with limited rights
• Shareholders have very different personal tax positions

The model articles state that dividends must follow shareholders’ respective rights. Many companies therefore need bespoke articles or new share rights before they can use this flexibility properly.

The Tax Benefits of Alphabet Shares

Any tax benefit comes from the shareholders’ different tax positions. The dividend tax rates for 2026/27 are:

Income Tax band	Rate on dividends
Basic rate	10.75%
Higher rate	35.75%
Additional rate	39.35%

Each person also has a £500 dividend allowance. Dividends do not reduce the company’s Corporation Tax, so the share structure affects shareholders’ personal tax rather than the company’s tax bill.

Worked Example

Alex and Sam are unrelated co-founders in England. Each takes a salary of £12,570. Sam also has £40,000 of rental profit, so all of Sam’s dividends fall into the higher rate band. The company has £60,000 available to distribute.

	Equal dividends	Different dividends
Dividend to Alex	£30,000	£37,700
Dividend to Sam	£30,000	£22,300
Dividend tax for Alex	£3,171.25	£3,999.00
Dividend tax for Sam	£10,546.25	£7,793.50
Total dividend tax	£13,717.50	£11,792.50

Their combined tax falls by £1,925. However, Sam receives £7,700 less, so this only makes sense if both shareholders genuinely agree to that outcome. Alphabet shares change who receives the money, so the decision needs a genuine commercial basis.

The Tax Rules That Limit Alphabet Shares

The main risk is the settlements legislation. HMRC can treat income as belonging to the person who provided it, rather than the person who received it.

Spouses and Civil Partners

An outright gift between spouses can fall outside these rules. The exemption does not apply if the gift has conditions, can return to the giver or is wholly or substantially a right to income.

HMRC’s guidance illustrates the difference:

• Likely to fail: New B shares with no votes and no rights to assets on a winding up. HMRC treats dividends on those shares as the husbands’ income in its example.
• Likely to pass: An outright gift of ordinary shares with rights to capital. HMRC accepts this after the Jones v Garnett decision.

HMRC also looks at the whole arrangement, not just one step within it.

Children

Different rules apply to minor children. If a child’s income from a parent’s settlement exceeds £100 in a tax year, all of it is usually taxed as the parent’s income. The £100 limit applies per parent.

Dividend Waivers

A shareholder can sometimes waive a dividend, but this is not a substitute for proper share rights. HMRC may treat a waiver in a close company as a settlement if a spouse, civil partner or minor child benefits.

Company Law and Compliance Requirements

Alphabet shares need correct paperwork before anyone receives a dividend. The exact steps depend on your existing shares and articles.

Action	What is usually required
Issue new shares	Directors need authority, and the company files form SH01 within one month
Rename a class	Form SH08
Vary class rights	Follow the articles or obtain class consent, then file any special resolution within 15 days and form SH10 within one month
Change the articles	Pass the required resolution and deliver the documents to Companies House
Update ownership records	Update the register of members and check any change to people with significant control

Every dividend must also meet the normal rules. A company must have available profits, hold a directors’ meeting, keep minutes and issue a dividend voucher. Dividends paid without enough profit can create serious consequences for directorsand will usually count as a director’s loan.

Other Tax Issues to Check

A new share class can affect more than income tax on dividends.

• Employee shares: Shares awarded to employees or directors can be employment related securities. The company may need to report them to HMRC by 6 July after the tax year.
• Capital Gains Tax: Gifts to a spouse or civil partner usually carry no immediate tax, but normal rules apply to other people. Check the value of the shares before you transfer them.
• Business Asset Disposal Relief: Shareholders usually need at least 5% of the shares and voting rights, plus an economic interest, for 2 years. A new class could affect this test.

The government also plans to cut the relief’s lifetime limit from £1 million to £500,000 for qualifying disposals from 6 April 2027. This still requires legislation in Finance Bill 2026-27.

Are Alphabet Shares Right for Your Company?

Alphabet shares tend to work best when they reflect a real commercial arrangement. Before you change your structure, consider:

• Why each shareholder should hold a separate class
• Who controls dividends and what happens if owners disagree
• What each shareholder would receive if the company is sold
• Whether family members hold shares with real capital rights
• How the structure fits with your overall approach to salary and dividends

A written shareholders’ agreement can help everyone understand how dividends and control will work.

The tax result depends on each shareholder’s position, and the legal documents need to match the plan. Our tax compliance and planning team can review whether alphabet shares suit your company. Contact Nichols & Co to discuss your share structure.