Paying dividends, and paying shareholders different amounts

This guide explains when a company can pay a dividend, the paperwork involved, and — the question that trips people up most — how to pay different shareholders different amounts, lawfully.

First: can the company pay a dividend at all?

A dividend can only be paid out of distributable reserves — the accumulated, realised profit the company has actually made and kept, after tax and any earlier dividends (Companies Act 2006, section 830). Paying more than that is an unlawful distribution, and the directors can be made to repay it personally. Take the reserves figure from the latest accounts, and keep the figure on the Dividends tab up to date.

Interim or final?

They are decided by different people and take effect at different times:

• An interim dividend is decided by the directors alone (a board minute). It becomes the shareholder's right only when it is actually paid.
• A final dividend is recommended by the directors and approved by the members by ordinary resolution. It becomes a debt the company owes on the date of that resolution.

Compaxit produces the right paperwork for each: a board minute for an interim, and a board recommendation plus a members' resolution for a final, with a dividend voucher for every shareholder paid.

The golden rule: same class, same rate

Every holder of a given class of shares must be paid the same amount per share, in proportion to their holding. This is the pari passu principle. You cannot simply pay one shareholder more per share than another within the same class — that is an unequal, and potentially unlawful, distribution.

So how do you pay shareholders different amounts?

There are two lawful ways, and Compaxit supports both.

1. Different share classes (“alphabet shares”). Different classes can carry different dividend rights, so you can declare a different rate on each — for example £2 on the Ordinary A shares and £1 on the Ordinary C shares. The dividend wizard lets you set a rate per class in one declaration and splits each class pro-rata automatically. This is the clean, low-admin route and the one most advisers prefer.

2. Dividend waivers. A shareholder can formally give up (waive) their entitlement to a dividend, leaving their share of it in the company. A waiver does not pay anyone else more per share — it simply means the waiving shareholder receives nothing and their portion stays as reserves. Three things must be right:

• It must be a formal deed, signed before the dividend is declared — you cannot waive after the event.
• The company must have had enough distributable reserves to pay the full dividend to every shareholder, including the waived amount — otherwise the whole distribution can be unlawful.
• It should have a genuine commercial rationale. Waivers are one of the areas HMRC scrutinises most closely under the settlements legislation (ITTOIA 2005), especially between spouses or where a child under 18 holds shares.

Compaxit records a waiver against a declaration, restores the waived amount to reserves, drops that shareholder's voucher from the paperwork, and produces a dated deed of waiver for signature. Have the deed reviewed by a solicitor before use.

The settlements watch-point

Whichever route you use, watch the same trap: if a high rate is voted on one class (or a waiver is used) that could not have been paid across every share from reserves, HMRC may treat the arrangement as a settlement and tax the income as if it were still the other person's. Keep the shares full-rights, keep the paperwork clean, and if in doubt check with the client's accountant. Compaxit flags this automatically when it spots the pattern.