You own a limited company with a spouse or business partner, and you want the dividends to come out in a way that suits both of you. Maybe one of you pays higher-rate tax and the other has unused basic-rate band going spare. Two tools come up again and again when people try to do this: dividend waivers and alphabet shares.
Used properly, both are perfectly legitimate. Used to shuffle income towards a lower-rate taxpayer with no real substance behind it, both can be unpicked by HMRC under the settlements legislation, leaving the "wrong" person taxed on the dividend anyway.
This guide explains what each one is, how they actually work, where the line sits, and how to keep yourself on the right side of it. It's written for owner-managed limited companies and contractors. It's general guidance, not advice on your specific facts.
What is a dividend waiver?
A dividend waiver is a formal decision by one shareholder to give up their right to a dividend that would otherwise be paid to them.
Normally a dividend is paid at the same rate per share to everyone holding that class of share. If you hold half the shares, you get half the dividend. A waiver lets one shareholder step out of the way so the others receive more, even though the company is paying out on a single class of share.
The waiver has to be in place before the right to the dividend arises. For a final dividend that means before it's formally declared at a general meeting. For an interim dividend it means before the dividend is paid or credited to the shareholder. A waiver signed after the event is worthless, and HMRC will treat the income as still belonging to the person who tried to give it up.
It must also be a proper legal document. In practice that means a deed of waiver, signed, witnessed, and kept with the company's records.
What are alphabet shares?
Alphabet shares are simply different classes of ordinary share in the same company, labelled by letter: A ordinary shares, B ordinary shares, C ordinary shares and so on. The "alphabet" tag just reflects the naming.
Because each class is separate, the directors can declare a different dividend on each class. You might pay £5,000 on the A shares and nothing on the B shares one year, then change it the next. That flexibility is the whole point.
To create them you usually amend the company's articles of association and issue or reclassify shares, recording everything at Companies House and in the statutory registers. Getting the share rights and the paperwork right is fiddly, which is where our company secretarial services come in.
Alphabet shares are common in family companies and among contractors who run a limited company jointly with a partner.
Why do people use them to split profit?
The driver is almost always the way dividends are taxed personally.
Every individual gets a dividend allowance, and dividends above it are taxed at rates that step up as your income rises. The headline figures for 2025/26 are below.
| Dividend tax band (2025/26) | Rate |
|---|---|
| Dividend allowance (first slice, tax-free) | £500 |
| Ordinary (basic) rate | 8.75% |
| Upper (higher) rate | 33.75% |
| Additional rate | 39.35% |
Source: gov.uk: Tax on dividends and the HMRC technical note on dividend rates.
The personal allowance for 2025/26 is £12,570, and the basic-rate band runs on the next £37,700 of taxable income, so dividends stay in the 8.75% band until total income reaches £50,270. After that the rate jumps to 33.75%. You can see the effect on your own numbers with our dividend tax calculator.
So if one owner is already a higher-rate taxpayer and the other has spare basic-rate band, paying more of the profit to the lower earner can cut the household tax bill. A waiver or a class of alphabet shares is the mechanism people reach for to do that.
The catch is that HMRC knows exactly why people do this, and it has a rule aimed squarely at it.
When does HMRC challenge a dividend waiver?
The relevant rule is the settlements legislation in Part 5, Chapter 5 of the Income Tax (Trading and Other Income) Act 2005. In plain terms, if you arrange for income to be paid to someone else but the arrangement contains an element of "bounty" (you are effectively making a gift), HMRC can tax that income on you, the person who gave it up, not on the person who received it.
A dividend waiver is a textbook bounty arrangement: you forgo money you were entitled to so that someone connected to you receives more.
HMRC's own guidance sets out the warning signs. According to its Company Taxation Manual and Trusts, Settlements and Estates Manual, the settlements legislation is likely to apply where:
- the retained profits are not enough to pay the same rate of dividend on all the issued shares,
- there has been a succession of waivers over several years, and the dividends that would have been paid without them exceed accumulated realised profits,
- there's other evidence that the same rate would not have been paid on all shares without the waiver, or
- the non-waiving shareholders are people the waiving shareholder can reasonably be regarded as wishing to benefit, such as a spouse or minor child.
The first point is the one that trips people up most. If you waive your dividend and the only reason the other shareholder's dividend works at all is that there were never enough reserves to pay everyone at that rate, the waiver looks artificial. HMRC's published example treats exactly that fact pattern as caught.
One relief does help married couples and civil partners: an outright gift of shares between spouses is normally outside the settlements rules, provided it's a genuine gift of the shares themselves and not just a right to income. That's why an outright transfer of real shares is generally more robust than a bare waiver. But it is not a free pass, and the income-only point still bites if what you've handed over has no real substance.
Are alphabet shares safer than waivers?
Often, but not automatically.
A waiver is inherently fragile because it only exists to redirect one year's income. Alphabet shares, by contrast, can be genuine shares with full rights to capital, votes and dividends. If a shareholder genuinely owns their class outright and bears the real risk and reward of ownership, dividends on that class are usually theirs for tax.
The danger is dressing up an income-shift as alphabet shares. If the lower-rate shareholder holds a class that carries little more than a dividend right, contributes nothing, and the dividends flow back to the household of the higher earner, HMRC can still argue there's bounty and apply the settlements legislation. The leading case in this area concerned a husband and wife company and turned on whether what passed between them was a genuine gift of shares or essentially a gift of income.
So the structure matters less than the substance. Real shares, real rights, a real commercial reason and consistent treatment are what make either approach stand up.
Illustrative example: a waiver that goes wrong
Illustrative example. Priya and Sam own all 100 ordinary shares in their consultancy company, 50 each. The company has £30,000 of distributable profit for the year. Priya is a higher-rate taxpayer; Sam has spare basic-rate band.
They want £600 per share paid only to Sam, so Priya signs a waiver and the board declares £600 a share.
The problem: £600 across all 100 shares would need £60,000 of reserves, and the company only has £30,000. The same rate could never have been paid on every share. That's HMRC's first warning sign, and the waiver only works because of it.
If HMRC applies the settlements legislation, the enhanced part of Sam's dividend, the slice that exists only because Priya stepped aside, is taxed on Priya at her higher rate. Roughly £15,000 of Sam's £30,000 (the half that would otherwise have been Priya's) can be reattributed to her. Instead of that slice being taxed at Sam's 8.75%, it's taxed in Priya's hands at 33.75%, plus they've created paperwork, risk and a possible enquiry for no real benefit.
Had the company simply paid £150 per share to both (£15,000 of dividend, well within reserves), there would be no bounty and nothing to challenge. The waiver added risk without adding anything HMRC couldn't see through.
How do you set up a valid dividend waiver?
If, after advice, a waiver is genuinely the right tool, the mechanics matter as much as the idea.
- Have a real reason. A commercial purpose, such as leaving funds in the company for a specific use, is far stronger than "to save tax".
- Get the timing right. Sign the deed before a final dividend is declared, or before an interim dividend is paid or credited. Never backdate.
- Use a deed. A waiver should be by deed, signed and witnessed, not a casual note.
- Check the reserves. Make sure the company could pay the same rate per share on every share from distributable profits. If it couldn't, expect a challenge.
- Don't make it a habit. A repeated annual waiver to the same connected person is one of HMRC's stated red flags.
- Keep the records. Board minutes, the deed, dividend vouchers and up-to-date statutory accounts all need to line up.
Because the downside of getting this wrong is an unexpected tax bill on the wrong person, this is an area where it pays to take tax advisory input before you act, not after HMRC asks questions.
Decision steps: waiver, alphabet shares, or neither?
A quick way to think it through:
- Is there a genuine commercial reason, beyond saving tax? If yes, your position is much stronger. If the only reason is the tax saving, pause.
- Could the company pay the same dividend rate on every share from reserves? If no, a waiver is high risk. Fix the reserves question first.
- Do you want a permanent split or a one-off? A permanent, genuine split of ownership points towards properly structured alphabet shares. A one-off points towards a carefully documented waiver, if anything.
- Are the shareholders genuinely contributing or bearing risk? Real owners with real rights are defensible. A nominal shareholder holding only an income right is not.
- Have you taken advice and documented it? Both routes live or die on paperwork and substance. Get them reviewed before you declare anything.
For many owner-managed companies, the cleanest answer is none of the above: pay dividends in proportion to genuine shareholdings, and set those shareholdings sensibly from the start. That's a conversation worth having when you first structure the company.
FAQs
Is a dividend waiver illegal?
No. A dividend waiver is a legitimate legal mechanism. The risk is tax, not legality. If the waiver has no commercial substance and mainly shifts income to a connected lower-rate taxpayer, HMRC's settlements legislation can tax the income on the person who waived it rather than the person who received it.
Do alphabet shares avoid the settlements legislation?
Not by themselves. Alphabet shares that represent genuine ownership, with full rights and real risk and reward, are generally respected. But if a share class is really just a route to pass income to a lower-rate taxpayer with no substance behind it, HMRC can still apply the settlements rules.
Can I waive a dividend for my spouse to save tax?
You can, but be careful. An outright gift of real shares between spouses or civil partners is normally outside the settlements rules, which is why transferring genuine shares is usually more robust than a bare waiver. A waiver that exists only to push this year's income to a non-working spouse, where reserves could never have paid everyone the same rate, is exactly what HMRC targets.
When must a dividend waiver be signed?
Before the right to the dividend arises. For a final dividend, that means before it's formally declared. For an interim dividend, before it's paid or credited to the shareholder. A waiver signed after the dividend has been declared or paid has no effect for tax.
What tax rates apply to dividends in 2025/26?
After the £500 dividend allowance, dividends are taxed at 8.75% in the basic-rate band, 33.75% in the higher-rate band and 39.35% in the additional-rate band for 2025/26. You can estimate your own dividend tax with our dividend tax calculator.
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The bottom line
Dividend waivers and alphabet shares are real, usable tools for splitting company profit, but they reward substance and punish artificiality. The test HMRC applies is simple to state and hard to fake: is this a genuine arrangement, or just a way to tax your income in someone else's name?
If you're weighing up how to share profit between shareholders in your company, we can help you do it in a way that holds up. Book a call with a Zmartly accountant and we'll review your shareholding, reserves and goals before you declare a thing.
