Dividend Waivers & Alphabet Shares

7 years ago by Oliver Atkinson

Due to the effect of National Insurance Contributions it is normally more tax-efficient to remunerate via dividends and receive a smaller salary.

Dividend Waivers & Alphabet Shares

If a company has one class of share and dividends are paid out pro rate to all shareholders then HMRC generally do not have any issues. However some companies have set up Alphabet Shares in order to pay different levels of dividend to different shareholders. This is generally done for one of three reasons:

Remuneration Dividends

If an employee receives shares which have no voting rights or rights to a fixed dividend then generally these share should not be used to receive dividends in lieu of salary or bonus payments with the aim of avoiding National Insurance payments. However, if the dividends have been received in the shareholder’s capacity as a shareholder and not an employee then they could be argued as allowable. If the dividend is solely based on the company’s performance then that could be classed as a return to the shareholder rather than linked to the employee’s performance.

Family Dividends

It can be tax-efficient to share income between family members and where this is done using one class of share with equal voting and dividend rights there is generally no problem. However where dividends are not to be paid to family members pro rata to holdings of ordinary shares there are two choices. The first is to use Dividend Waivers to forego a shareholder’s right to a dividend. The second is to create Alphabet Shares so that different dividends can be declared for each class of share. The second choice is most favourable if the Waivers are not likely to be a one-off occurrence.

Quasi Partnership Companies

If co-owners of a company want to share profits in a way which is proportionate to the contribution each has made to the business then Dividend Waivers or Alphabet Shares can again be used. Provided the Alphabet Shares carry full equity and voting rights, and have been paid for at a fair price, there should be no risk that NIC should be due on the dividends. However, HMRC have started to take the view that if the dividend has its roots in the work which the shareholder has done for the company then the dividend can be classed as earnings and should be subject to NIC.

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