If you run a family company, the way you take money out of the business can make a huge difference to your personal tax bill.
Many business owners focus on how much profit the company makes, but fewer think about how those profits are distributed between shareholders. That’s where an alphabet share structure can become incredibly valuable.
Used correctly, it can provide greater flexibility and potentially reduce the overall tax paid by family members.
Taking Profits from a Limited Company
If you operate through a limited company, profits usually need to be extracted personally in one of two ways:
- Salary
- Dividends
In many cases, it’s tax-efficient to:
- Pay a salary up to the personal allowance
- Take additional income as dividends
However, dividends come with their own rules.
Important Dividend Rules to Understand
Before a company can pay dividends, there are a few key things to remember.
Dividends Can Only Be Paid from Profits
A company must have sufficient retained profits available after Corporation Tax has been paid.
If there aren’t enough retained profits, dividends cannot legally be declared.
Standard Share Structures Can Be Restrictive
In a normal share structure, dividends must usually be paid equally according to share ownership.
For example, if two shareholders each own 50% of the shares, they must each receive 50% of any dividend paid.
While this sounds simple, it may not be the most tax-efficient option if shareholders have very different income levels.
What Is an Alphabet Share Structure?
An alphabet share structure gives different shareholders different classes of shares.
For example:
- A Ordinary Shares
- B Ordinary Shares
- C Ordinary Shares
This allows the company to pay different dividend amounts to each class of shareholder.
In practical terms, it means dividends can be tailored to suit each person’s tax position.
Why Could This Save Tax?
Not every shareholder pays tax at the same rate.
Some family members may:
- Have unused personal allowances
- Still have basic rate tax bands available
- Have little or no other income
Others may already be higher or additional rate taxpayers.
An alphabet share structure can help direct more dividends towards shareholders with lower tax exposure.
Example of the Potential Tax Savings
Let’s look at a simplified example.
Albert and Anna each own 50% of a company and the business wants to distribute £50,000 in profits.
Albert has no other income during the tax year, while Anna already earns £200,000 from property income.
Under a normal share structure:
- They each receive £25,000
- Anna pays tax at much higher dividend tax rates
- Their combined dividend tax bill exceeds £10,900
However, with an alphabet share structure:
- Albert could receive £49,500
- Anna could receive £500
- The overall family tax bill falls by more than £7,000
That’s a significant saving from simply restructuring the share classes correctly.
Is an Alphabet Share Structure Right for Your Business?
While the tax benefits can be substantial, alphabet shares need to be set up properly.
There are:
- Company law considerations
- Tax rules to follow
- HMRC implications to consider
- Legal documentation requirements
What works well for one family company may not suit another.
That’s why professional advice is so important before making changes to your company structure.
Could Your Family Company Be More Tax Efficient?
Many family-run businesses are paying more dividend tax than necessary simply because their share structure lacks flexibility.
A carefully planned alphabet share structure could help your family extract profits in a far more tax-efficient way.
At Jon Davies Accountants, we help business owners across Liverpool and the UK structure their companies in a way that supports both tax efficiency and long-term growth.
If you’d like advice on dividends, shareholder planning or whether an alphabet share structure could work for your business, get in touch with Jon and the team today.
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk