Preference shares are a less common but important part of company ownership in the UK. They sit between ordinary shares and bonds, giving investors a mix of stable income and some growth potential. For beginners learning how companies raise money and pay investors, preference shares are a simple middle option.
What Are Preference Shares?
Preference shares, also called preferred stock, give investors special rights compared to ordinary shareholders. They’re called “preference” shares because these investors are paid first when dividends are issued or if the company closes down.
Most preference shares pay a fixed dividend, providing regular income and stability for cautious investors. However, holders usually have little or no voting power, so they can’t take part in company decisions.
Preference shares combine features of both shares and bonds. They represent ownership in a company but act more like bonds because of their fixed payments. For companies, they’re a way to raise funds without taking on more debt or losing control. For investors, they offer steady returns, often higher than traditional bonds.
How Preference Shares Work in the UK
In the UK, preference shares are mainly issued by large or well-established companies that want to raise money while keeping control. They’re also common in private firms and venture capital deals, where investors wish to receive regular income and some protection if the company faces trouble.
Some preference shares are traded on the London Stock Exchange (LSE), but they’re less common and trade less frequently than ordinary shares. This makes them better suited to long-term investors rather than short-term traders.
Companies issue preference shares to:
- Raise funds without increasing debt.
- Offer a steady income to attract cautious investors.
- Strengthen finances without giving up control.
Investors can hold preference shares in a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP) to make dividends more tax-efficient. Dividends are usually paid quarterly or twice a year, and preference shareholders are always paid before ordinary shareholders.
Overall, preference shares appeal to investors who want reliable income and smaller price changes in their portfolio.
Types of Preference Shares
Preference shares come in several types. Each one offers a different mix of income stability, flexibility, and growth potential. Understanding how they work helps investors choose the right option for their goals and risk level.
Cumulative Preference Shares
Cumulative preference shares provide investors with additional protection. If a company cannot pay dividends in a given year, the unpaid amount is carried forward. The company must pay all missed dividends before ordinary shareholders get anything.
This type suits investors who want steady income and lower risk. Cumulative shares are often issued by banks, utility companies, and large firms that focus on regular payouts.
Non-Cumulative Preference Shares
With non-cumulative preference shares, missed dividends are not carried forward. If the company skips a payment, that income is lost for good. These shares are riskier but often come with a higher dividend rate.
They are common in financial or fast-growing companies that prefer flexibility in difficult years. Investors who choose them should be comfortable with some uncertainty in exchange for higher potential returns.
Participating Preference Shares
Participating preference shares allow investors to earn additional dividends when the company performs well. Along with the fixed dividend, holders may get a bonus or a share of extra profits.
This type offers steady income with some upside, making it a good choice for investors who want both income and limited growth potential. Companies with profit-sharing structures often issue these shares.
Convertible Preference Shares
Convertible preference shares can be changed into ordinary shares after a set period or when certain conditions are met. This allows investors to switch from fixed income to potential growth if the company’s share price rises.
They are popular among investors who want regular dividends at first and the option to benefit from share price gains later. Always check the conversion terms, such as timing and conversion ratio, before investing.
What’s the Difference Between Cumulative and Non-Cumulative Preference Shares?
The main difference between these two types is how missed dividend payments are handled.
Cumulative preference shares give investors more protection. If a company cannot pay dividends in one year, the unpaid amount is carried forward. The company must pay all missed dividends before ordinary shareholders receive anything. For example, if a £5 annual dividend is missed for 2 years, the investor will receive £15 when payments resume.
Non-cumulative preference shares work differently. If the company skips a dividend, that payment is lost and cannot be claimed later. This type gives the company more flexibility during hard times but increases investors’ income risk.
In simple terms, cumulative shares suit investors who want steady, reliable income, while non-cumulative shares suit companies that need financial flexibility.
Difference Between Preference Shares and Ordinary Shares
| Feature | Preference Shares | Ordinary Shares |
|---|---|---|
| Dividends | Fixed, paid before ordinary shareholders | Variable, depend on company profits |
| Voting Rights | Usually none | Full voting rights |
| Risk Level | Lower, due to priority dividends | Higher, linked to market performance |
| Growth Potential | Limited | Greater potential for capital gains |
| Repayment in Liquidation | Paid before ordinary shareholders | Paid last |
Preference shares give investors steady income and lower risk. Ordinary shares can appreciate in value, but their prices fluctuate more and carry a higher risk.
Advantages of Preference Shares
Preference shares benefit both investors and companies by combining the steady income of bonds with elements of equity ownership.
For Investors
- Steady income: Fixed dividends offer predictable returns for income-focused investors.
- Priority payments: Dividends and assets are paid before those of ordinary shareholders.
- Lower volatility: Prices tend to move less than ordinary shares, adding stability.
- Conversion potential: Some can be converted into ordinary shares for future growth.
- Portfolio balance: They add diversification between shares and bonds.
For Companies
- Flexible funding: Raises capital without increasing traditional debt.
- Control retention: Attracts investors without giving up voting rights.
- Deferred payments: Dividends can be paused in weaker years without default risk.
- Institutional appeal: Fixed returns make them attractive to long-term investors.
Risks and Limitations
Preference shares have some risks that investors should understand before buying.
- No voting rights: Holders usually cannot take part in company decisions.
- Dividend risk: With non-cumulative shares, missed dividends are lost if the company skips payments.
- Limited growth: Fixed dividends mean investors earn less when the company performs well.
- Low liquidity: Preference shares often trade less, so selling them quickly can be hard.
- Credit and market risk: If the company struggles, dividends or redemption value may fall.
For most investors, preference shares work best as part of a diversified portfolio. They offer a steady income while other assets provide more growth.
How to Buy Preference Shares in the UK
You can buy preference shares through brokers that are regulated by the Financial Conduct Authority (FCA). These brokers give access to UK and international markets. Here’s how to start:
Choose a trusted FCA-regulated broker. Regulation helps keep your money safe and ensures fair trading rules.
Look for companies that offer preference shares. They are usually listed separately from ordinary shares and may include “Pref” in their name or ticker.
Before buying, read about the dividend rate and whether the shares are cumulative or non-cumulative. Also, check if the company can buy them back later. These details show how risky or rewarding the investment might be.
Buy the shares through your broker just like any other stock. Remember, preference shares don’t trade very often, so prices may move slowly.
If possible, hold your shares in a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP). These accounts help reduce or delay tax on your dividends and profits.
Buying preference shares is easy once you understand the basics. Pick a reliable broker, check the terms carefully, and use a tax-efficient account to get the most from your investment.
Tax Treatment in the UK
Preference share dividends are taxed the same way as ordinary share dividends. UK investors can use the dividend allowance, the first £500 (as of the 2025/26 tax year), which is tax-free.
After that:
- 8.75% for basic-rate taxpayers
- 33.75% for higher-rate taxpayers
- 39.35% for additional-rate taxpayers
Holding preference shares in an ISA or SIPP can shield investors from these taxes entirely.
FAQs
They can be a good choice for people who want a steady income and lower risk. Preference shares pay fixed dividends but have limited growth and no voting rights, so they work best as part of a mixed portfolio.
Most pay dividends every three or six months. The amount is usually fixed, so investors get regular income. With cumulative shares, missed payments are made later; with non-cumulative ones, they are not.
Yes, you can sell them through a broker, but they trade less often than ordinary shares. It may take longer to find a buyer, so they suit long-term investors.
Yes. The first £500 of dividends is tax-free in the UK (2025/26 tax year). After that, you pay tax based on your income level. Holding them in an ISA or SIPP can make them tax-free.
Final Thoughts
Preference shares offer UK investors a middle path between bonds and ordinary shares. They can deliver consistent dividends and some protection in tough markets. Yet, their limited growth and voting power mean they fit best within a diversified, long-term investment plan.
For income-focused investors, understanding the structure and risks of preference shares can help build a more balanced and reliable portfolio.
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