Alphabet Share Structure

Where there are several shareholders, it is possible to minimise the total tax bill on extracted profits by first using each shareholder’s personal allowance (if available), dividend allowance and then the remainder of their basic rate band, rather than paying all the dividends to one person and suffering tax on dividends at their dividend marginal rate.

However, unlike salary there is no flexibility to choose how much to pay each shareholder as dividends must be paid in relation to shareholdings. This restriction can be overcome by having different classes of shares for each shareholder so the dividend paid to each shareholder can be tailored each year. This kind of share structure is often referred to as an ‘alphabet’ share structure as it is usual to designate different classes of shares by different letters of the alphabet, e.g. A ordinary shares, B ordinary shares, C ordinary shares, etc.

Note: Careful consideration should be given to the rights attaching to each class of share where the aim is to preserve future entitlement to business asset disposal relief

Example

DEF Ltd is a family company. Nick and his wife Rachel are shareholders and directors. Nick holds 100 A shares and Rachel holds 100 B shares. In 2020/21 , Nick has other income of ￡14,000 and Rachel has no other income. The personal allowance is set at ￡12,500 for 2020/21.  

The company has post-tax profits of ￡60,000 they wish to extract as dividends.

As a starting point, it is possible to pay dividends of ￡2,000 to Nick tax-free to utilise his dividend allowance and to pay dividends of ￡14,500 to Rachel tax-free (to use both her personal allowance of ￡12,500 and her dividend allowance of ￡2,000). This leaves ￡43,500 to pay as dividends. Nick has ￡34,000 of his basic rate band remaining (￡37,500 - ￡1,500 - ￡2,000) and Rachel has ￡35,500 of her basic rate band remaining (￡37,500 - ￡2,000). As long as neither receives a dividend which is more than their remaining basic rate band, the remaining dividends will be taxed at 7.5% (a combined tax bill of ￡3,262.50 (￡43,500 @ 7.5%).

Had all the profits of ￡60,000 been paid to Nick as a dividend, the associated tax bill would have been ￡10,350 ((￡2,000 @ 0%) + (￡34,000 @ 7.5%) + (￡24,000 @ 32.5%)). By having different classes of shares and paying dividends to both Nick and Rachel, their combined tax bill is reduced by ￡7,087.50