What is a dividend waiver?

A dividend waiver is a formal legal agreement in which a shareholder voluntarily gives up their right to receive a dividend. In effect, the company retains the waived profits instead of paying them out. Other shareholders still receive their dividends at the normal per-share rate (other shareholders’ dividends do not change), while the waived portion remains in the company’s ownership.

Importantly, a dividend waiver must be formalised in writing. In the UK, it must be executed as a deed (signed, dated, witnessed) before any right to the dividend arises. This makes it legally binding and helps ensure HMRC will accept it.

How does a dividend waiver work?

In a normal dividend declaration, the company’s distributable profits are paid out pro rata to each shareholder based on their shareholding. With a waiver, one shareholder simply opts out of receiving all or part of their dividend. The other shareholders still get their full share at the agreed per-share rate, and the waived amount stays as retained profit in the company.

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In practice, this means the company does not have any extra profits to redistribute – the waived funds are not handed to other shareholders, they remain in the business.

When can a waiver be used?

When companies make a profit, they often distribute some or all of this money to their members (aka the shareholders). Distributions are typically in the form of dividend payments. Companies usually declare and pay dividends at a fixed rate per share of each class, with eligible shareholders entitled to receive dividend payments relative to the number of shares they hold.

Dividend waivers are typically used in specific situations, such as:

Inactive shareholders

A founder or former director who still owns shares but doesn’t need extra income may waive dividends so that others can keep more profit in the business. If a founding shareholder does not actively participate in the company day-to-day (e.g. as a director) but still wishes to retain their stake in the business, they may choose to waive their dividend entitlement for a specified period or indefinitely.

Family businesses

In a family-run company, senior family members (e.g. retiring parents) might waive dividends so younger relatives receive them while profits remain for growth.

Tax planning

If one shareholder is nearing a higher tax threshold, they might waive dividends to avoid extra tax. Please note that waivers shouldn’t be used as a substitute for profit redistribution or to redirect income. They must be commercially justified, meaning that it must make sense for the shareholder, not just the company.

In smaller owner-managed companies, keeping profit in the business may be more tax-efficient and profitable in the long term than withdrawing funds for personal use, paying additional tax on that income, and then reinvesting their own money in the company when required.

A shareholder may also wish to avoid dividends for a period if the additional income would make them liable to the High Income Child Benefit Charge. This charge applies when a person’s individual annual income exceeds £60,000.

Short-term needs

Sometimes a waiver is used to keep funds available for a specific project or to smooth out cash flow in a given year. For example, this could be for retaining profits to finance a planned capital investment, business expansion, or the launch of a new product.

These waivers can cover a single dividend or all dividends for a set period. They must always be agreed before the dividends are declared (a shareholder cannot retroactively waive a dividend they were already entitled to).

Supporting business growth

Another common reason is to keep cash in the company for growth or big expenses. By waiving dividends, shareholders allow the company to invest profits rather than taking the money as income. The waiver should be driven by a genuine commercial purpose and documented as such.

Rules for distributing dividends

When declaring dividends (waived or not), the company must follow UK company law. Directors can make decisions without shareholder consent, but this varies according to the Companies Act 2006 and the articles of association.

Rules for distributing dividends include:

Enough profits

Only accumulated realised profits can be paid as dividends. If declaring dividends (with any waivers) would require more profits than the company actually has, that violates the rules.

Directors must ensure the company has sufficient “accumulated realised profits” (distributable profits) before declaring a dividend under section 830 of the Companies Act 2006.

Equal rights

Dividends must be paid per share according to the share class. A waiver cannot create extra dividends for others. The portion of profit that is waived must remain in the company, not be distributed among receiving shareholders.

A waiver simply means one shareholder gets no money; it doesn’t enlarge the pie for others. The directors must ensure the dividend declaration still complies with the Companies Act even when a waiver is in place.

How to create a dividend waiver

To be valid, a waiver must be carefully documented and executed. While there is no official Companies House form for a dividend waiver, HMRC expects these documents to follow formal deed requirements – including correct execution, witnessing, and timely adoption. A dividend waiver is still a formal document, usually in the form of a Deed of Waiver, which is signed by a shareholder to voluntarily relinquish their right to receive a dividend.

What to include in your deed of waiver

A waiver is typically done by executing a Deed of Waiver, which is a formal written document. The deed should clearly identify the following:

• Shareholder’s name and address
• Number and class(es) of shares held
• Company in which the shares are held
• Whether the dividend waiver applies to a single interim or final dividend, to all dividends within a specified period, or indefinitely. The latter option is not recommended
• If the shareholder has more than one class of shares, whether the waiver applies to dividends attributable to all classes or only certain classes
• The reason for waiving the dividend(s)
• Date of waiver
• Shareholder’s signature
• Name, address, and signature of a witness to the deed of waiver

After it’s signed, the deed is returned to the company, which will then proceed with the dividend process as usual.

Who can witness a dividend waiver?

Any adult (over 18) who is not a party to the deed and has no interest in the waiver can serve as a witness. To uphold best practice and avoid potential conflicts of interest, they should be unconnected to the shareholder and not benefit from the waiver (e.g. not a family member, fellow shareholder, or director of the company). The witness must be physically present when the shareholder signs the deed. The deed should then include the witness’s handwritten name, address, and signature.

Timing and record-keeping requirements

Timing is critical. For final dividends, the waiver deed must be in place before the dividend is formally declared. For interim dividends, it must be in place before payment. Executing the deed after the entitlement date invalidates the waiver.

Once executed, directors should formally acknowledge the waiver. Shareholders usually declare final dividends at an annual general meeting (AGM) after approving the annual accounts. The board minutes should record acceptance of the waiver, and the waiver deed should be filed with the company’s statutory records at the registered office.

After that, the company can proceed to declare and pay dividends to other shareholders as normal, with the waived amounts remaining as retained profit.

Dividend waivers and HMRC scrutiny

Because dividend waivers can shift income between taxpayers, HMRC watches them closely under the anti-avoidance rules. The key concern is whether the waiver is really for a business reason or simply a tax-driven gift to another shareholder.

HMRC considers peculiar dividend waivers as ‘bounteous arrangements’, particularly in cases where individuals or companies appear to have benefited from unusually generous tax concessions. Where a waiver goes beyond what would normally be agreed on a commercial basis, HMRC may examine whether it gives rise to a taxable benefit or indicates an attempt to avoid tax.

Anti-avoidance and settlements legislation

HMRC guidance warns that if a company with few shareholders declares a dividend while one shareholder has waived their entitlement in circumstances where others benefit, the settlement rules might apply. HMRC will look at whether the company had sufficient profits and who benefits from the waiver. The purpose of the legislation is to prevent individuals from diverting income to other people to gain tax advantages.

Best practices for compliance

To reduce risk:

• Document a commercial reason
• Execute a proper deed before declaring dividends
• Ensure that waivers do not result in another shareholder receiving more than they otherwise would
• Keep the waived funds in the company
• Limit frequency and duration

Waivers should last no more than 12 months. Long-term dividend waivers can inadvertently reduce the value of the associated shareholdings while potentially increasing the value of other shares in the company.

Where shareholders require waivers regularly or for long periods, it may be better to redesignate some or all the shares to a class that doesn’t carry dividend rights (e.g. alphabet shares or management shares).

If in doubt, seek professional advice or consider more permanent solutions.

Alternatives to regular dividend waivers

If a company finds itself needing frequent waivers, it may be better to adjust the share structure instead.

Share redesignation as a long-term strategy

A common alternative is to create different classes of shares with different dividend rights, which is known as share redesignation. This can achieve the same effect as a waiver without repeated deeds, but HMRC can still scrutinise arrangements where profits would not support equal dividends. Share class amendments must be approved via special resolution and notified on Form SH08 to Companies House.

Is a dividend waiver right for my company?

Dividend waivers can be useful, but they are not always the best or only tool. If a waiver is a one-off or short-term solution, it may be appropriate. However, repeated use to save tax may attract HMRC attention.

Ultimately, the decision depends on your profit levels, tax profiles, and growth plans. If you’re unsure whether a waiver is right for your company, consider seeking expert guidance. For support with the compliance aspects of your business, explore our Hassle-Free Compliance Service that helps you maintain company records and ensure compliance year-round.