Answers · UK 2025/26

What is a dividend waiver and how is it taxed?

A dividend waiver is a legal deed in which a shareholder gives up their right to some or all of a dividend before it is declared, so other shareholders receive more. It must be executed properly (by deed, before the dividend is voted) or HMRC can attack it as a settlement and tax the waiving shareholder anyway.

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A dividend waiver lets a shareholder formally give up their entitlement to a dividend, so that the profits which would have gone to them are instead distributed among the remaining shareholders in proportion to their own holdings. It is commonly used in small family companies where one shareholder (often a spouse who is a higher earner, or someone who does not need the income) waives their dividend so the company can pay a larger dividend to a lower-earning shareholder without breaching company law rules on distributing profits equally per share class. **How it must be done** To be effective for tax purposes, a dividend waiver must be executed as a deed (a formal legal document, signed, witnessed and delivered) before the right to the dividend arises -- in practice, before the dividend is declared or the entitlement crystallises. A waiver signed after the dividend has already been declared, or a verbal agreement, will not be respected by HMRC. **The settlements legislation risk** HMRC can invoke the settlements legislation (Income Tax (Trading and Other Income) Act 2005, Part 5, Chapter 5) if a dividend waiver looks like an arrangement to divert income to someone paying less tax, particularly between spouses or family members, where the waiving shareholder retains an element of control or benefit. If HMRC successfully argues this, the waived dividend can still be taxed on the person who waived it, defeating the purpose of the waiver entirely. **Reducing the risk** Waivers are much more likely to be accepted where: the company has genuine commercial reasons (for example, retaining cash for growth rather than simply reducing tax), the waiver is not a repeated annual pattern purely timed around income needs, and the remaining shareholders hold their shares for real economic reasons rather than purely as a tax-planning vehicle. Waivers used to fund unusually large dividends to a shareholder with little or no other income (for example an adult child or a spouse not otherwise economically active in the business) attract the most HMRC scrutiny. **Company law point** A dividend waiver does not change how much is legally available to distribute -- it only changes who receives it. The company must still have sufficient distributable reserves to pay the (larger) dividend to the non-waiving shareholders. **Worked example** A company has two equal shareholders, each entitled to a dividend of £10,000 (£20,000 total). One shareholder, a higher-rate taxpayer, waives their right by deed before the dividend is declared. The company then pays £20,000 entirely to the other shareholder, a basic-rate taxpayer, who pays dividend tax at 8.75%/33.75% rates on the amount above the £500 dividend allowance, rather than the waiving shareholder paying at 33.75%/39.35%. Because the waiver was properly executed and reflects a commercial decision (reinvesting the waiving shareholder's share of profit or reflecting different roles in the business), it is more defensible than an ad hoc arrangement. **Practical takeaway** Dividend waivers are legitimate tax planning tools but carry real HMRC challenge risk, especially between spouses. Take professional advice, document the commercial rationale, and always execute the waiver by deed before the dividend is declared, not after.