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Limited companies make dividend payments to their shareholders from any profits left over after tax. The dividends that you pay out to shareholders don’t have to be for an equal amount, but your shareholders will need to have different classes of shares for this to happen. In this article we explain how dividends can be paid out for unequal amounts.
 

How do dividends and shares work?

What are the benefits of paying different dividends out?

How do I set up different classes of shares?

Shares are used to show ownership of a limited company – literally a share of the business. Some shareholders might own more shares than others, which means that they own different percentages of the business.
 

 
The percentage of shares owned is used to calculate the amount of dividends that a shareholder receives. Someone who owns 30% of a business’ shares will usually receive 30% of the profits, for example. Working on this basis can help to ensure that shareholders get a proportional amount according to their investment in the business.

This assumes that all of the shareholders own the same type of shares, but there might be times that a company wants to pay them in a different way. Creating different classes of shares, sometimes called alphabet shares, allows a company to do this.

What are alphabet shares?

The term ‘alphabet shares‘ describes the different classes of shares that can be issued by a limited company. Each class of shares (A shares, B shares, C shares and so on) can be assigned different rights. These could be voting rights, or the percentage of dividends that the shareholder of that particular class of share is entitled to.

For instance, an ‘A share’ shareholder might be paid dividends at a different rate to a ‘B’ shareholder. A ‘C’ shareholder may not have the same voting rights as a ‘B’ shareholder. This means that you could have a variety of shareholders with very different dividend payouts and voting rights.

 

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If you’re just dividing by share ownership, the benefit is that it’s a fair and simple way of dividing company profits. But what about alphabet shares?

Using different classes of shares means that a limited company can be more flexible in the way it pays out dividends.

 
It lets the company move beyond a pro rata basis of ownership, and instead pay shareholders based on their involvement or investment in the company.

Creating alphabet shares can become really useful in this sort of situation, giving you more control over who can influence the business.

Shareholders who receive dividend payments may need to pay Dividend Tax on this type of income. The amount of income they receive in a tax year, and the amount of dividends they earn, affects how much Dividend Tax they need to pay.

You’ll need to tell Companies House about the shares in your business when you first incorporate the company, or if you allot more shares later on. They’ll also need to know the details of each shareholder and what it is that they hold.

The details of what your shareholders (and different types of shares) are entitled to should be recorded in the company’s Articles of Association. This document is a bit like having written rules which set out how to run the company.

Learn more about how we can help with your limited company. Get an instant online quote, or call the team on 020 3355 4047.

About The Author

Lauren Harvey

A fully AAT and ACCA qualified accountant, I support a wide range of businesses, from sole traders and partnerships to larger limited companies. Learn more about Lauren.

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amanda malone
amanda malone
29th November 2021 6:21 pm

If I pay 2 shareholders the same dividends one year, can they receive different amounts of dividends the year after?

Elizabeth Hughes
Admin
Elizabeth Hughes
30th November 2021 3:33 pm
Reply to  amanda malone

Hi Amanda Thanks for your message! Dividends are paid from profits, and these can fluctuate, so you don’t have to pay a shareholder a dividend payment at the same amount each year. The amount that you pay as a dividend depends on what type of shares the shareholder has, so if shareholders own the same number, and same type of shares, their dividends will be the same. Each time you issue shares (or change them, such as issuing more), you’ll need to let Companies House know, so they can update the information they have about your company. I hope that… Read more »

amanda malone
amanda malone
29th November 2021 6:23 pm

Di I have to inform Companies House of every shareholder and the equities they hold?

Gruff
Gruff
1st December 2021 10:06 am

Can 2 people with B shares be given diffrent amount of dividends? Or are all B shares given the same rate of dividends? I.e. if I received £2,000 with 5% of companys B shares can somone else receive £3,000 with 5% B shares.

Elizabeth Hughes
Admin
Elizabeth Hughes
1st December 2021 10:15 am
Reply to  Gruff

Hi Gruff

Good to hear from you. Each class of shares would need to have the same allocation of dividend, so two people with the same number of B shares will receive the same amount of dividend. If the company needed different amounts for the same shareholding, they would need more alphabet shares (C, D, E… and so on) depending on how many people require them. I hope that helps, but please do get in touch if there’s anything else we can do for you.

Best wishes

Elizabeth

S Singh
S Singh
10th January 2022 3:46 pm

Hi

Once we have the A and B shares up and running for two Directors, say, can the % split of profit via dividends by varied each time a dividend is declared? For example, if each director’s investment, and level of additional involvement changes on a regular basis, then it would be ideal to be able to split the profit differently each time based on an agreed split.

Elizabeth Hughes
Admin
Elizabeth Hughes
11th January 2022 11:10 am
Reply to  S Singh

Hi there, Thanks so much for your message. It’s important when those A & B shares are set up that they’re set up with different rights to receive dividends (this isn’t automatic), but as long as those different rights are set up, then you can chop and change the dividends each month as much as you like. It’s up to the directors, jointly in a board meeting, to decide what dividends should be paid each month. You’d still technically own 50% of the company each (presumably 1 share each, out of a total of 2 shares), but the important part… Read more »

Anthony
Anthony
29th March 2022 3:42 pm

Can a Class B shareholder take a higher dividend than a Class A shareholder if agreed by both parties when the Class A shareholder does not wish to take such a high amount?

Elizabeth Hughes
Admin
Elizabeth Hughes
4th April 2022 10:27 am
Reply to  Anthony

Hi Anthony

Thanks very much for your message. You’re right, different share classes can indeed be assigned a different share of the company’s profits, but it’s important that this is consistent (that is, dividends are always taken in those ratios by that particular class of shareholder). This article might also help, but just let us know if there’s anything at all we can help with!

Best wishes

Elizabeth

Farooq
Farooq
26th May 2022 4:21 pm

So if you had a simple 5 ordinary shares alloted to 5 different people(1 ordinary share each), their dividend would be equal. Does that mean each shareholder has 20% of the company or they all own 100%?

Elizabeth Hughes
Admin
Elizabeth Hughes
30th May 2022 9:14 am
Reply to  Farooq

Hi Farooq

Thanks for your message. Yes you’re right, 5 people with an equal amount of the same type of shares would receive equal dividends, and each would own 20% of the company. I hope this is useful, but let us know if you have any questions and we’ll do all we can to help!

Best wishes

Elizabeth

Stuart Byles
Stuart Byles
7th June 2022 9:12 pm

Hi, If I’m going to pay different rates of dividend to different share classes where would I need to declare which class gets which rate? in the filed accounts?

Elizabeth Hughes
Admin
Elizabeth Hughes
9th June 2022 1:46 pm
Reply to  Stuart Byles

Hi Stuart Thanks for messaging. So, when you issued the shares these would have been recorded as ‘prescribed particulars’ in the Statement of Capital, to show the different classes of shares in use, and what the shareholders are entitled to. To pay dividends you must hold a directors’ meeting to ‘declare’ the dividend, and record the minutes of the meeting, even if you’re the only director! You must also create a dividend voucher for each dividend payment. The payments are recorded as a transaction in your bookkeeping records. We have a guides on this on our support pages, or give… Read more »

Stuart Byles
Stuart Byles
9th June 2022 8:54 pm

Thank you Elizabeth

yprentice
yprentice
29th June 2022 3:52 pm

Hi, I am a director in a company. There are another 3 directors, we all have equal 25% share in company. The reserve pot is £100,000 at year end, if I decide to leave and take the £25,000 owing from the reserve is this treated as a dividend? The other 3 directors do not want to take a dividend. Thank you

Elizabeth Hughes
Admin
Elizabeth Hughes
30th June 2022 2:47 pm
Reply to  yprentice

Hello there Thanks for your message. As long as you all have an equal number of the same type of shares then yes, you’ll receive the same amount, although dividends are normally paid following the agreement of the other directors if you all have the same voting rights. If they’re not yet ready to declare dividends then unfortunately, these cannot be paid. If you do decide to leave the company then what happens to your share (and to your shares) might be affected by any original agreements you made when you set up the company and issued shares. I hope… Read more »

Joanthan Boddington
Joanthan Boddington
30th June 2022 8:23 am

Very helpful article, thanks. One question if I may, you mention that… ‘It’s important when those A & B shares are set up that they’re set up with different rights to receive dividends (this isn’t automatic), but as long as those different rights are set up, then you can chop and change the dividends each month as much as you like.’ How do you set up the shares with the different rights that you mention above? And can it be done once the shares are already set up (e.g. if the shares have already been issued as a separate class,… Read more »

Elizabeth Hughes
Admin
Elizabeth Hughes
30th June 2022 2:09 pm

Hello there Thanks for sending us a message. So, when you first register the company you’ll need to provide information about the number and type of shares that the company has, and the details of each shareholder. This is known as a statement of capital. You’ll also need to provide the ‘prescribed particulars’ which explain what rights come with each type of share. You can make changes at a later date but, depending on the voting rights that they’re entitled to, you may need the agreement of the other shareholders and directors before making any changes. I hope this is… Read more »

Fay
Fay
22nd July 2022 5:37 pm

Hi Elizabeth I also have found this enlightening thank you 🙏 My question is definitely on the same topic and I have been having real trouble trying to find the answer ! My husband set up a limited company with myself and I own equal shares in in this limited company ,owning half the company each and having the same rights but with different classes of shares him 50% A shares me 50% B shares,initially in case we wanted to pay a dividend payment to particular class of share without having to pay the other, you say in another reply… Read more »

Elizabeth Hughes
Admin
Elizabeth Hughes
25th July 2022 5:25 pm
Reply to  Fay

Hi Fay Thanks for your question! It makes it sound very formal doesn’t it? Basically, the company (and the people who run it) must be able to show that the decision to issue dividends was made through the proper channels, and with the agreement of anyone in the business who has authority to make such a decision. So, the meeting doesn’t need to be a formal meeting as such, but you will need a document which shows the decision being made, that everyone agrees, and the value of the dividend that will be paid out to each shareholder. The directors… Read more »

Jeff Smith
Jeff Smith
25th November 2022 12:20 pm

Hi,

My son is in the process of setting up a company 60/40 ownership. Founder A will get 60% “A Shares”, and Founder B will get 40% “B Shares”.

Are there any risks to look out for as the minority shareholder within this type of arrangement? e.g. If Founder B wishes to exit at some point in the future, will their shares be worth anything?

Hypothetically, with 100% of the A Shares / 60% of the aggregate number of shares in issue, could Founder A with majority just decide that B Shares get no dividend?

Elizabeth Hughes
Admin
Elizabeth Hughes
29th November 2022 4:58 pm
Reply to  Jeff Smith

Hi Jeff Thanks for getting in touch. Because the company has issued different types of shares, and each class of shares can have its own rights, this depends on what each type of share entitles the holder to, so it’s difficult to say for sure without knowing more. One way to check this is if your son takes a look at the shareholders’ agreement or the company’s constitution (also known as the articles of association). More often than not, one class can declare a dividend different to the other. The value of the shares when selling them is determined by… Read more »

keith
keith
3rd March 2023 11:01 am

Hi, I am in a business (limited company) with a partner. We each hold 1 ordinary (A type share) i.e. 50% ownership. My partner is likely to step back operationally from the business for health reasons and we would like to acknowledge the greater input from myself (going forward) by increasing the balance of dividend payments in my favour. Would a legitimate way of doing this be simply to issue more ordinary shares to me – thereby increasing the % of the business that I own and splitting future dividend payments along the new proportions?
Thanks

Elizabeth Hughes
Admin
Elizabeth Hughes
3rd March 2023 4:38 pm
Reply to  keith

Hi Keith Thanks for your message. Yes, you can issue additional shares, although in situations like this it’s more common to transfer shares from one partner to the other. Just remember to let Companies House know! Another option is to change the type of shares that you each own. These are sometimes known as share classes, or alphabet shares. For instance, if your share remained an ‘A’ share, and your partner’s share became a ‘B’ share, and they have different rights and entitlements assigned to them. I’ve linked to the guide above, but in short you’ll need to amend the… Read more »

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