Dividends are one of the perks of being a director or shareholder in a business. It’s a welcome financial benefit in return for involvement in the business’ growth and development. They can also be a tax-efficient way for directors to take money out of their business.
Dividends are usually issued to shareholders in proportion to the value of shares they own. It’s also possible to shares in different classes, known as alphabet shares. Using these can allow companies to be more flexible when paying dividends, so they don’t have to pay everyone the same amount.
Our video below introduces dividends in general, and then we’ll get stuck in to paying dividends using different share classes.
Do dividend payments all have to be the same amount?
Shareholders usually receive dividend payments on the basis of how many shares they own in the company. It also depends on the type of shares that they own.
Some companies issue different types of shares to different shareholders, known as alphabet shares. Each category of shares is given a letter of the alphabet to help identify it, which is where the name comes from.
One type of share might entitle the shareholder to a percentage of the profits, but no voting rights, whilst another only permits voting rights. It’s up to the company to decide what each class of shares entitle shareholders to. For example, in an imaginary company, there are three types of shares, A, B, and C.
A shares give shareholders dividends at a higher rate than B shares, and they have voting rights too.
B shares give the shareholder a lower rate of dividend, as well as voting rights in the company.
C shareholders have the same rate of dividends as A shareholders, but have no voting rights at all.
Issuing different share classes is useful if the directors want to pay dividends based on different criteria. This might be on the basis of their daily involvement in the business, or their financial investment.
They’re also a great option for a company that wants to give shares to an employee or family member. This way, they can pay dividends, without having to allocate any voting rights within the business.
How to declare dividends on different classes of shares
Even if you’re the sole director of the company, you will need to hold a director’s meeting before issuing dividends on any share class. If you are the sole director, this might seem a bit strange. It basically means that you produce written minutes, documenting the dividend amount that you receive.
Once this step is complete, you then need to fill in a dividend voucher. Keep a copy for the business’ records, and issue a copy to the recipient. The voucher will need to include the date, company name, the names of the shareholder(s), and the dividend amount.
It is also worth noting that you pay dividends out of a company’s profits. They also don’t qualify as a business cost when it comes to calculating your Corporation Tax.
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