What Exactly Are Alphabet Shares?

Alphabet shares are simply different classes of shares in the same company. They are labelled A shares, B shares, C shares, and so on. Each class can carry different rights to dividends, voting, and capital on a sale or winding up.

The key feature is that each class can receive a different dividend rate. One shareholder might get £10,000 per share. Another gets £5,000. Or one class gets a dividend and another class gets nothing in a given year.

This is not about splitting existing shares. It is about creating new classes of shares that sit alongside your ordinary shares. The structure is entirely legal and widely used in owner-managed businesses. HMRC accepts alphabet share structures provided they are set up correctly and have genuine commercial substance.

For agency founders, alphabet shares solve a specific problem: how to reward different people differently without giving away control or creating an administrative mess.

Why Agency Founders Use Alphabet Shares

Most agencies start with one founder holding 100% of the ordinary shares. As the business grows, you might want to bring in a co-founder, a key senior hire, or an investor. The natural instinct is to issue more ordinary shares. But that creates a problem: everyone gets the same dividend per share.

If you hold 80% and a new co-founder holds 20%, and you pay a £100,000 dividend, they get £20,000. That might be exactly what you want. But what if you want to pay them a larger share of profits in some years and less in others? Or what if you want to give a performance bonus tied to profits without messing with payroll?

Alphabet shares let you do this. You keep your ordinary shares. The new person gets A shares. You set the dividend rights on the A shares to whatever you agree. In year one, you might pay them £30,000 on their A shares. In year two, £50,000. In year three, nothing. The dividend per share is set each time you declare it.

This flexibility is particularly useful for agencies because revenue and profit can vary significantly year to year. A retainer book might be stable. Project work creates spikes. Alphabet shares let you match reward to performance without restructuring ownership each time.

A Real Example

Take a 12-person digital agency in Manchester Northern Quarter turning over £1.2m. The founder owns 100% of the ordinary shares. They want to bring in a creative director as a minority shareholder. They agree the creative director will get 10% of the company. But they also agree that in years where the agency hits a specific profit target, the creative director gets an additional 5% of profits as a dividend.

Using alphabet shares, the founder issues the creative director 10% of the company via A shares. The A shares carry a right to a standard dividend matching the ordinary shares. But they also carry a right to a supplementary dividend if profits exceed £250,000. That supplementary dividend is paid only on the A shares. The founder's ordinary shares do not receive it.

Result: the creative director gets 10% of the standard dividend pool, plus an extra 5% of profits above target, paid entirely through dividends. No PAYE. No employer NI. Clean and tax-efficient.

How Alphabet Shares Work in Practice

Setting up an alphabet share structure requires three things:

  • Articles of association that permit multiple share classes. Most standard articles do. If yours do not, you can amend them by special resolution.
  • A share subscription agreement that sets out the rights attached to each class. This is a legal document. Do not draft it yourself.
  • Board resolution to issue the new shares and to declare dividends on each class separately.

Each class of shares must have a distinct name. You can call them A shares, B shares, C shares, or use more descriptive names like "Founder Shares" and "Growth Shares". The label does not matter legally. What matters is the rights attached.

When you pay a dividend, you pass a board resolution declaring a dividend on each class separately. The dividend per share can be different for each class. You record the dividend in the company accounts and issue dividend vouchers to each shareholder showing the amount they received and the tax credit.

The administrative burden is slightly higher than a single class structure. You need separate dividend vouchers and separate entries in the company's register of members. But for most agencies, the extra work is minimal. Your accountant or bookkeeper handles it as part of the year-end process.

Tax Implications of Alphabet Shares

The tax treatment of alphabet shares is straightforward in principle but requires care in practice.

Dividends paid on alphabet shares are taxed exactly the same as dividends on ordinary shares. The recipient gets the same dividend tax rates: 8.75% for basic rate taxpayers, 33.75% for higher rate, 39.35% for additional rate. The £500 dividend allowance applies to total dividends across all share classes.

The company gets no tax deduction for dividends paid. Dividends are paid from post-tax profits. This is the same for all share classes.

The potential tax complication is HMRC challenging the structure as a settlement or a disguised remuneration arrangement. This is most likely where the alphabet shares are issued to a family member who does not work in the business, or where the dividend rights are clearly disproportionate to the value of the shares.

For example, if you issue B shares to your spouse who does not work in the agency, and those B shares carry a right to 90% of dividends, HMRC may argue the dividend income should be taxed on you as the settlor. This is the settlements legislation (ITTOIA 2005, Part 5, Chapter 5). It applies where an arrangement exists to divert income from one person to another without a genuine commercial purpose.

For agency founders using alphabet shares with working shareholders, this risk is low. If the shareholder works in the business and the dividend reflects their contribution, HMRC will not challenge it. But if you are considering alphabet shares for a non-working family member, speak to your accountant first.

Alphabet Shares vs Growth Shares

Alphabet shares are often confused with growth shares. They are different structures for different purposes.

Growth shares are a separate class of shares that only participate in the future growth of the company above a certain valuation threshold. They are typically used for key employees who you want to incentivise with equity but who do not want to pay for shares at the current value. Growth shares are a form of equity incentive and have specific tax rules under the employment-related securities legislation.

Alphabet shares are about different dividend rights on existing value. They are not an incentive scheme. They are a structural tool for distributing profits differently among shareholders.

You can combine both. An agency might issue growth shares to a new senior hire, with those growth shares being a separate class (say, C shares) that carry specific dividend rights. But the two concepts are distinct and serve different purposes.

When Should an Agency Founder Consider Alphabet Shares?

Alphabet shares are not right for every agency. Here is when they make sense:

  • You have multiple shareholders with different cash needs. One founder might want to take maximum dividends. Another might prefer to reinvest. Alphabet shares let each class receive a different dividend rate.
  • You want to reward key staff with profit-linked dividends. Instead of a bonus through payroll, you issue a small number of alphabet shares to the employee and pay a dividend linked to performance. This saves employer NI (13.8%) and employee NI (2% above £50,270).
  • You are bringing in a co-founder or investor who wants a different dividend structure. Perhaps they want a fixed dividend preference before ordinary shareholders get anything. Alphabet shares can provide that.
  • You are planning an exit and want to manage tax efficiently. Alphabet shares can help with Business Asset Disposal Relief (BADR) planning, though the rules are complex and you need specific advice.

Alphabet shares are less useful when:

  • You are the sole shareholder. There is no one to differentiate.
  • All shareholders want identical dividend treatment. Ordinary shares work fine.
  • You are trying to avoid tax by diverting income to a non-working family member. HMRC will challenge this.

Setting Up Alphabet Shares: The Process

If you decide alphabet shares are right for your agency, here is the practical process:

  1. Review your articles of association. Your accountant or solicitor checks whether your current articles allow multiple share classes. If not, you pass a special resolution to amend them.
  2. Agree the rights of each class. This is the critical step. You need to decide: dividend rights (fixed, variable, preferential), voting rights (full, limited, none), capital rights on a sale or winding up, and any conversion rights. Document these in a share subscription agreement.
  3. Value the shares. If you are issuing alphabet shares to an employee or investor, you may need a valuation to determine the subscription price. For a new issue at par value (typically £0.01 per share), this is straightforward. But if the shares carry preferential rights, the valuation can be more complex.
  4. Issue the shares. Pass a board resolution. Complete the SH01 return to Companies House within one month. Update the company's register of members.
  5. Declare dividends properly. Each dividend declaration must specify the class of shares receiving the dividend and the amount per share. Keep minutes of the board meeting where dividends are declared.

As ICAEW qualified accountants, we see alphabet share structures set up correctly and incorrectly. The most common mistake is failing to document the rights properly. If the rights are ambiguous, HMRC can argue the shares are actually ordinary shares and tax accordingly. Get the paperwork right from the start.

Alphabet Shares and Exit Planning

If you are building your agency with a view to selling it, alphabet shares can play a role in your exit strategy.

On a sale, each class of shares typically converts into ordinary shares or is redeemed. The sale proceeds are distributed according to the rights attached to each class. This can be used to give certain shareholders a larger share of the sale proceeds without them holding a larger percentage of the company.

For Business Asset Disposal Relief (BADR) purposes, alphabet shares held by an individual qualify for the 14% capital gains tax rate, provided the shares meet the qualifying conditions: 5% shareholding, officer or employee of the company, and held for at least two years before disposal. Each class of shares is assessed separately for the 5% test.

This means an alphabet share structure can allow multiple individuals to qualify for BADR on their respective share classes, even if their overall economic interest in the company is different. But the rules are detailed and fact-specific. If you are planning an exit, talk to your accountant about whether an alphabet share structure helps or hinders your BADR position.

Common Questions Agency Founders Ask

Can I Issue Alphabet Shares to Myself?

Yes. You can hold both ordinary shares and alphabet shares. Many founders do this to separate their "founder" equity from additional shares issued for specific purposes. But there is usually no tax advantage to holding multiple classes yourself. The benefit comes from differentiating between shareholders.

Do Alphabet Shares Affect My Corporation Tax?

No. Corporation tax is calculated on company profits before dividends. The share structure does not change the tax the company pays. Dividends are a distribution of post-tax profits.

Can I Convert Alphabet Shares Back to Ordinary Shares?

Yes, if the rights attached to the alphabet shares include a conversion right. This is common in structures designed for a future exit. The conversion is typically at a pre-agreed ratio.

What Happens to Alphabet Shares if a Shareholder Leaves?

This depends on your shareholders' agreement. Most agreements include good leaver/bad leaver provisions that require the departing shareholder to sell their shares back to the company or to remaining shareholders. Alphabet shares are treated the same as ordinary shares in this context.

Is an Alphabet Share Structure Right for Your Agency?

Alphabet shares are a tool, not a strategy. They solve specific problems: different dividend rates for different shareholders, tax-efficient reward for key staff, and flexibility in profit distribution. They are not a magic bullet for tax avoidance or a substitute for proper shareholder agreements.

If you are running a multi-founder agency, planning to bring in a key hire as a shareholder, or considering how to structure an investor relationship, alphabet shares are worth discussing with your accountant. The setup cost is modest. The ongoing administration is light. And the flexibility can be valuable as your agency grows.

But get the advice first. A poorly documented alphabet share structure creates more problems than it solves. Work with an accountant who understands agency businesses and share structures. If your current accountant is vague on the details, that is a red flag.

For more on how agency founders structure their companies for tax efficiency and growth, read our guide on incorporation and structure for agencies. If you are considering bringing in a co-founder or investor, our services page covers how we help agency founders with share structure planning.