Timing is Everything: Making Dividends Work for Your Family Company
Dividend payments can be a highly tax-efficient way to extract profits from a company—especially for family-run businesses. But when shareholders have different income levels or personal tax circumstances, getting the timing and structure right becomes crucial.
👪 The Challenge with Family Companies
It’s common for family-owned businesses to have shareholders with very different financial profiles:
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Some may have little other income and sit well within the basic rate tax band
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Others may be higher or additional rate taxpayers, already subject to significant income tax
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Some may not need the income immediately at all
Distributing dividends equally across the board isn’t always the most efficient approach—but making it flexible requires careful planning.
🅰️ Using Alphabet Shares: More Flexibility, More Risk
To pay different dividend amounts to different shareholders, many companies create an ‘alphabet share’ structure. Each shareholder is issued a different class of shares (e.g., A shares, B shares, etc.), which allows the directors to declare different dividends for each class.
⚠️ Caution: This approach carries anti-avoidance risks. HMRC may challenge such payments as disguised remuneration if they appear to be rewards for services rather than returns on investment. If misused, the payments could be reclassified as employment income, attracting PAYE and NIC obligations.
🛡️ Always seek specialist advice before setting up an alphabet share scheme.
❌ What if You Don’t Have Alphabet Shares?
If your company only has one class of share, all dividends must be paid pro rata. However, shareholders who don’t need their dividend can waive it, provided this is done before the dividend is declared.
✅ For the waiver to be valid:
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It must be executed by deed (a formal legal document)
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It must not be part of a tax avoidance arrangement, especially between spouses or family members
Even if legally valid, HMRC can still challenge waivers under settlement rules if the arrangement is seen as a transfer of income between individuals.
🧾 Case Study: Strategic Timing Pays Off
A recent case at the Upper Tax Tribunal has reaffirmed that interim dividends can be timed for tax efficiency—even where there’s only one class of share.
Background:
In March 2016, two brothers (equal shareholders) received a £40 million dividend split. One was UK tax-resident, the other non-resident the following year.
Their goal? Time the dividends so:
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The UK-resident brother received his before 6 April 2016, subject to the then-lower 30.56% tax rate
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The non-resident brother received his after 6 April, when he was no longer UK-resident and not taxable on UK dividends
HMRC tried to argue that both dividends were “due and payable” at the same time, and thus both should be taxed in the same tax year.
The courts disagreed. The tribunal upheld that each interim dividend is taxed when actually paid. Since the non-resident brother didn’t receive his share until December 2016, he wasn’t liable to UK tax on it.
🎯 Key takeaway: Interim dividends (unlike final dividends) can be paid at different times and still retain their tax character per individual recipient—if done correctly.
🧠 Planning Your Dividend Strategy?
Whether you’re:
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Looking to reduce tax for family shareholders
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Exploring alphabet shares or dividend waivers
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Unsure how to time your payments in a compliant way…
Merranti can help. We’ll review your share structure, dividend policy, and tax position to ensure that your family company operates both efficiently and within the rules.
📞 Get in touch with us today to explore smarter, safer dividend planning for your business.
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