SHAREHOLDERS in Allied Domecq will not now have the option of taking shares instead of cash for their latest dividend payment.

Allied is taking advantage of a tax break which, following the Budget, will not exist from April 7, 1999. By paying its half-year dividend of 9.44p as a foreign income dividend (FID), it can reclaim tax paid overseas back from the Inland Revenue.

This means Allied will save #25m. It said the change was necessary because of the Chancellor's decision to abolish the tax credit payable to pension funds on dividends.

That made the normal dividend payment method much less attractive, as pension funds can no longer claim back the advance corporation tax paid on dividends by companies.

The abolition of tax credits for pension funds means that they will receive the same net income whether or not a dividend is paid as a conventional dividend or an FID. The position of UK individual tax paying customers is also unaffected.

However, from Allied Domecq's point of view it removes the constraints on paying an FID. Because its foreign income is largely taxed abroad rather than in the UK, it has been unable, in previous years, to offset all the ACT paid against mainstream corporation tax. The company was effectively taxed twice.

Under tax legislation relating to FIDs it is not possible for a company to offer a scrip dividend alternative as well as paying a FID.

Allied said it regretted the disadvantage the changes would cause for certain classes of shareholder, such as Pep holders, charities and overseas investors.

Allied also defended pointed out that it had paid #72m in unrecoverable ACT on profits earned overseas.

A spokesman for the company said: ''We are not exploiting a loophole, we are taking advantage of a perfectly legitimate piece of tax legislation in order to maximise returns to our shareholders.''

The company has not yet decided whether to repeat the exercise over the next three years until abolition of the tax benefit. It will be considered when distributions are made.

''In doing so, the group will have in mind the opportunity to recover surplus ACT already written-off and thereby enhance earnings per share.''