What Are Alphabet Shares? UK Guide to A & B Shares (2026/27)

Alphabet shares are different classes of ordinary shares, usually called A shares, B shares and C shares, that let a UK limited company pay a different dividend to each class. They are common in family companies, especially where spouses or civil partners own the business together. This guide explains what alphabet shares are, how ordinary A and B shares differ, how to set them up, how to declare dividends on them correctly, and the HMRC rules that decide whether they save tax in 2026/27.

What Are Alphabet Shares?

"Alphabet shares" is an informal name for having more than one class of ordinary share in a company, with each class labelled by a letter: Ordinary A shares, Ordinary B shares, Ordinary C shares and so on. The rights attached to each class are set out in the company's articles of association.

In most small companies the classes are identical except for one thing: the directors can declare a different dividend on each class. Each class usually keeps the same voting rights, the same right to share in the company's assets on a winding up, and the same nominal value, often £1 or £0.01 per share.

So if one shareholder holds A shares and another holds B shares, the company can pay £20 per share on the A shares and nothing on the B shares this quarter, then the reverse next quarter, without anyone transferring shares.

Ordinary A Shares vs Ordinary B Shares

People often ask what the difference is between ordinary A shares and ordinary B shares, or between class A and class B shares. In a typical alphabet share structure, the answer is: only what the articles say.

The letters themselves mean nothing in law. "A" shares are not senior to "B" shares unless the articles make them so. Some companies do give a class different voting or capital rights, for example non-voting B shares for employees, but that changes the tax position (see the HMRC section below), so it should be a deliberate choice.

Why Do Companies Use Alphabet Shares?

With a single class of shares, dividends have to be paid in proportion to shareholdings. If two people own 50 shares each, every dividend is split 50/50. Alphabet shares remove that restriction. Common reasons include:

• Spouses or civil partners with different incomes – paying more to the partner with unused tax bands
• Family members in the business – rewarding adult children who work in the company without changing control
• Key employees – sharing profits with a manager without diluting the founders' dividends
• Different contributions – reflecting that one shareholder has put in more work or capital in a particular year
• Outside investors – keeping investor returns separate from founder dividends

By far the most common use is a couple who both own the company, where one partner is a higher-rate taxpayer and the other has little or no other income.

Alphabet Shares Worked Example for 2026/27

Emma and Daniel own a trading company equally. Emma takes a salary and has other income that already puts her in the higher-rate band. Daniel has no other income. The company has £20,000 of profit available to distribute this year.

The figures below use the 2026/27 dividend allowance of £500 and dividend tax rates of 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate).

How the figures work:

• 50/50 split – Emma pays 35.75% on £9,500 (after her £500 allowance) = £3,396.25. Daniel's £10,000 is covered by his personal allowance of £12,570, so he pays nothing.
• All to Daniel – the first £12,570 is covered by his personal allowance, the next £500 by the dividend allowance, and the remaining £6,930 is taxed at 10.75% = £744.98.

That is a saving of about £2,650 a year. It only works if the arrangement survives HMRC's settlements rules, so read that section before relying on figures like these.

Pros and Cons of Alphabet Shares

Advantages:

• Pay different dividends to different shareholders each year
• Use each shareholder's personal allowance, dividend allowance and basic-rate band
• Reward people who work in the business without changing ownership percentages
• More robust than relying on dividend waivers
• Flexible year to year: the directors decide the rate for each class each time

Disadvantages:

• Needs new articles of association and Companies House filings to set up
• Every dividend needs careful paperwork: a rate per class, minutes and vouchers
• HMRC can challenge income-shifting under the settlements legislation
• Badly drafted shares (for example, dividend rights only) can lose the spouse exemption
• Doesn't help with shares given to children under 18

How to Set Up Alphabet Shares in a Limited Company

The steps depend on whether you are issuing new shares or converting existing ones. A typical process for an existing company is:

1. Check the articles of association – many companies use the model articles, which don't provide for different classes. You will usually need new or amended articles that set out each class and allow the directors to declare dividends on one class without the others.
2. Pass the resolutions – changing the articles needs a special resolution (at least 75% of the votes). Redesignating existing shares into classes, and giving the directors authority to allot new shares of a class, are usually done by ordinary resolution. Check whether pre-emption rights need to be disapplied for a new issue.
3. File at Companies House – send the special resolution and the amended articles within 15 days. Report new share allotments on form SH01 within one month, and a redesignation of existing shares on form SH08 within one month.
4. Update the company records – update the register of members to show each shareholder's class, and issue new share certificates for each class.
5. Set up each class in your dividend software – so that board minutes and vouchers show the correct class and rate.

How to Declare Dividends on Alphabet Shares

Once the classes exist, every dividend must be declared properly. The normal dividend rules apply, with a few points that matter specifically for alphabet shares.

Check distributable reserves for the total

Under the Companies Act 2006, a company can only pay dividends out of profits available for distribution. When you declare dividends on several classes at once, it is the total across all classes that must be covered, not each class on its own. Our guide to illegal dividends explains what happens if reserves fall short.

Set a rate per class, not per person

The directors (for an interim dividend), or the shareholders on the directors' recommendation (for a final dividend), decide an amount per share for each class. Every share in a class must receive the same amount per share. You can't pay one A shareholder £10 per share and another A shareholder £5 per share. If you need that, they should hold different classes, or one of them needs a valid dividend waiver signed before the dividend is declared.

Record it in board minutes

The board minutes should record, for each class:

• the class of share
• the amount per share
• the total payable on that class
• the payment date
• confirmation that there are enough distributable reserves for the total

A class can be declared at £0. The minutes should make clear which classes are paid this time and which are not.

Issue a dividend voucher for each payment

Each shareholder who receives a dividend needs a dividend voucher showing the company name, the shareholder's name and address, the class of share, the number of shares held in that class, the amount per share, the total and the payment date. If someone holds two classes that are both paid, the vouchers must make clear what was paid on each class.

Alphabet Shares and HMRC: The Settlements Legislation

Whether alphabet shares save tax depends on the settlements legislation in Chapter 5 of Part 5 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). This is the rule HMRC uses to challenge income-shifting between family members.

The basic rule (section 624)

If someone (the "settlor") makes an arrangement that isn't commercial, and income goes to another person while the settlor keeps an interest, that income can be taxed as the settlor's. Giving a spouse shares in profits that only you generate, so the dividends are taxed at their lower rate, can be a settlement.

The spouse exemption (section 626)

There is an important exemption for outright gifts between spouses and civil partners. Income from the gift isn't taxed on the giver, provided that:

• the gift is outright, with no strings attached, and the giver keeps no interest in it, and
• the property given is not "wholly or substantially a right to income".

That second condition is where alphabet shares need care. Ordinary shares with full voting rights and a full right to capital on a winding up are more than a right to income. Shares that carry only a right to dividends, with no votes and no share in the capital, may be treated as "wholly or substantially a right to income", and then the exemption doesn't apply.

Jones v Garnett (Arctic Systems)

In Jones v Garnett [2007] UKHL 35, known as the Arctic Systems case, the husband earned almost all of the company's income and his wife held half the ordinary shares. The House of Lords agreed with HMRC that there was a settlement, but held that the spouse exemption applied because the wife's shares were ordinary shares with full rights, not just a right to income. HMRC lost.

For alphabet shares, the lesson is that classes of ordinary shares that differ only in dividend rights, and otherwise carry normal voting and capital rights, are in a much stronger position than shares stripped of everything except dividends.

Alphabet Shares for Family Members

• Spouses and civil partners – the most common use, subject to the settlements rules above
• Adult children and other relatives – possible, but HMRC may look closely if they don't work in the business, because the spouse exemption doesn't cover them
• Children under 18 – legally possible, but if a parent gives the shares, dividends of more than £100 a year are taxed on the parent (section 629), which removes most of the benefit
• Employees – possible, but shares acquired because of employment are "employment-related securities". The company must register the scheme and file an annual return with HMRC by 6 July, and there may be income tax and National Insurance if the employee pays less than market value
• Investors – common in larger companies, often with different voting or capital rights

Alphabet Shares vs Dividend Waivers

A dividend waiver is where a shareholder gives up a dividend before it is declared, so the others receive more. Waivers can achieve a similar result, but HMRC regularly challenges them when they shift income to a spouse, and they are generally only safe with a clear commercial reason and enough reserves to have paid the waiving shareholder too.

Alphabet shares are usually the more robust structure, because each class's rights are written into the articles and nobody is giving up a right they already have. Waivers still have a place, for example a one-off decision by a majority shareholder to leave profits in the company.

Common Mistakes to Avoid

• Paying different rates without amending the articles – the classes must exist in the articles first
• Different rates within one class – every share in a class gets the same amount per share
• Leaving a shareholder out of a class dividend – everyone in the class must be paid unless they signed a waiver in advance
• Missing Companies House filings – amended articles within 15 days, SH01 or SH08 within one month
• Shares that are only a right to income – removing votes and capital rights can lose the spouse exemption
• Checking reserves class by class – reserves must cover the total of all classes declared
• Vouchers that don't show the class – each voucher should state the class, the number of shares and the rate per share
• Using alphabet shares for children under 18 – the £100 parental settlement rule usually removes the benefit

Frequently Asked Questions

What are alphabet shares in simple terms?

They are separate classes of ordinary shares, such as A and B shares, that allow a company to pay a different dividend on each class, so shareholders don't have to receive dividends strictly in proportion to how many shares they own.

What is the difference between ordinary A shares and ordinary B shares?

Only what the articles of association say. In most alphabet share structures they are identical except that the directors can declare a different dividend on each class.

Are alphabet shares legal in the UK?

Yes. Having several classes of ordinary share is a normal company structure under the Companies Act 2006, as long as the articles set out the classes and their rights.

Can I add alphabet shares to an existing limited company?

Yes. Amend the articles by special resolution, then either issue new shares of each class or redesignate existing shares. File the resolution and articles within 15 days, and form SH01 or SH08 within one month.

Can a company pay a dividend on one class and nothing on another?

Yes, if the articles allow the directors to declare dividends on each class separately. The board minutes should record which classes are paid and at what rate.

Can two shareholders in the same class receive different amounts?

Only in proportion to the number of shares they hold. The amount per share must be the same across a class. A different rate needs a separate class, or a valid dividend waiver signed before the dividend is declared.

Can alphabet shares have different voting rights?

They can, if the articles say so, but giving a spouse non-voting, dividend-only shares can mean the shares are "wholly or substantially a right to income", which risks losing the spouse exemption from the settlements rules.

Will HMRC challenge alphabet shares?

HMRC can use the settlements legislation where income is shifted to someone who didn't earn it. Outright gifts between spouses of ordinary shares with full rights are usually protected, as the Arctic Systems case showed. Dividend-only shares and shares given to children under 18 are more exposed.

How are dividends on alphabet shares taxed?

Exactly like any other dividend. For 2026/27 the first £500 is covered by the dividend allowance, then dividends are taxed at 10.75%, 35.75% or 39.35% depending on the shareholder's tax band.

Are alphabet shares the same as Alphabet Inc (Google) shares?

No. Alphabet Inc is Google's parent company, and its A and C shares trade on the stock market. "Alphabet shares" in UK company law means different classes of shares in your own limited company.

Summary

Alphabet shares let a limited company pay different dividends to different shareholders, which can make good use of a spouse's or family member's tax bands. They need correct articles of association, the right Companies House filings and careful paperwork for every dividend: a rate per class, reserves checked for the total, board minutes and a voucher for every payment. The tax saving depends on the settlements legislation, so take advice before setting them up.

Dividify takes care of the paperwork for alphabet shares. Add each share class to a company, set a rate per class in the board minutes, and create matching dividend vouchers for every shareholder in a few clicks. Start your free trial today.