The Short Answer
Share premium is the amount a shareholder pays for a new share over and above its nominal value.
If a company issues a £1 share and the investor pays £500 for it, £1 is share capital and £499 is share premium. The £499 goes into a separate line on the balance sheet called the share premium account, inside capital and reserves.
Two things follow from that, and they are the parts most guides skip. First, share premium is not profit, so it is not taxed as income and it cannot be paid out as a dividend. Second, company law treats it almost exactly like share capital, which means it is locked in unless you go through a formal legal process to release it.
The page one results for this term are mostly glossary entries and formation agent blogs. They define it well enough. What they rarely cover is the bookkeeping, the restrictions, and what to do when a growing company finds tens of thousands of pounds sitting in a reserve it cannot touch.
Why Share Premium Exists At All
Every UK share has a nominal value, sometimes called par value. It is the figure printed on the share certificate and recorded at Companies House. For most small companies it is £1, 1p or 0.01p.
Nominal value has nothing to do with what a share is worth. A company that started with 100 £1 shares might, five years later, be worth £1.5 million. Each of those shares is then worth around £15,000, but the nominal value is still £1.
When that company issues new shares, it cannot sensibly sell them at £1. The existing owners would be handing away value for nothing. So the new investor pays the market price, and the law needs somewhere to put the difference between the price and the nominal value. That somewhere is the share premium account.
Section 610 of the Companies Act 2006 makes this compulsory. If a company issues shares at a premium, whether for cash or for something else, a sum equal to the premiums must be transferred to the share premium account. It is not optional and it is not a presentation choice.
The opposite situation is banned. Under section 580 a company cannot issue shares at a discount, meaning for less than their nominal value. That is one reason founders pick a small nominal value in the first place, and we explain why that matters in our guide to called up share capital not paid.
How To Calculate Share Premium
The formula is simple:
Share premium = (issue price per share − nominal value per share) × number of shares issued
A few quick examples:
| Shares issued | Nominal value | Price paid per share | Share capital | Share premium |
|---|---|---|---|---|
| 1,000 | £1 | £1 | £1,000 | £0 |
| 1,000 | £1 | £4 | £1,000 | £3,000 |
| 50 | £0.01 | £800 | £0.50 | £39,999.50 |
| 20 | £1 | £2,500 | £20 | £49,980 |
The total cash received is always share capital plus share premium. Nothing else is going on.
The Journal Entries
Issuing shares at a premium is a three-way entry. Using the last row of the table above, where an investor pays £50,000 for 20 £1 shares:
| Account | Debit | Credit |
|---|---|---|
| Bank | £50,000 | |
| Share capital | £20 | |
| Share premium | £49,980 |
That is ordinary double entry bookkeeping. The cash goes up as an asset, and equity goes up by the same amount, split between the two equity accounts.
If the money arrives before the shares are formally allotted, it should sit in a holding account, often called "share application monies" or a suspense account, until the board allots the shares. Once allotted, the balance is cleared into share capital and share premium as above.
Costs of the share issue
Section 610(2) lets the company write off the expenses of the share issue, and any commission paid on it, against the share premium account. Under FRS 102 section 22, incremental costs that relate directly to issuing equity are deducted from equity rather than expensed through the profit and loss account.
So if legal fees for the investment round were £3,000, the entry is:
| Account | Debit | Credit |
|---|---|---|
| Share premium | £3,000 | |
| Bank or creditors | £3,000 |
These costs are capital in nature, so in our experience they should not be claimed as a deduction for corporation tax either. We regularly see share issue legal fees sitting in "legal and professional" on the P&L, reducing taxable profit when they should not be.
Where Share Premium Sits On The Balance Sheet
Share premium is equity. It is not an asset and it is not a liability. It appears in capital and reserves, usually like this:
| Capital and reserves | £ |
|---|---|
| Called up share capital | 125 |
| Share premium account | 70,775 |
| Profit and loss account | (12,000) |
| Shareholders' funds | 58,900 |
The total of capital and reserves always equals net assets, which is the accounting equation doing its job.
If you file micro-entity accounts, you will not see share premium as a separate line. The micro-entity format collapses everything into a single "capital and reserves" figure. The share premium account still exists in law and in the company's own records. It just is not shown on the public filing.
One important point: the share premium account is a number, not a pot of money. The cash that created it may well have been spent on salaries, stock or software within months. The account records where the funding came from. It says nothing about whether the money is still in the bank.
Share Premium vs Share Capital
People often ask whether these are the same thing. In practice they are treated almost identically, but they are recorded separately for good reasons.
| Share capital | Share premium | |
|---|---|---|
| What it represents | Nominal value of shares issued | Amount paid above nominal value |
| Where it sits | Capital and reserves | Capital and reserves |
| Shown on confirmation statement | Yes, in the statement of capital | Not as a separate figure |
| Affects shareholders' liability if unpaid | Yes | Yes, any unpaid premium is also owed |
| Can be distributed as a dividend | No | No |
| Can be reduced | Yes, by formal reduction of capital | Yes, by the same formal process |
| Can fund a bonus issue | Not applicable | Yes |
| Can absorb share issue costs | No | Yes |
The key line is section 610(4). It says the rules on reducing share capital apply to the share premium account as if it were part of the company's paid up share capital. So whatever you cannot do with share capital, you generally cannot do with share premium either.
What Share Premium Can Be Used For
The list is short. Section 610 permits the share premium account to be used to:
- Write off the expenses of the issue of those shares, and any commission paid on them.
- Pay up new bonus shares issued to existing members as fully paid. This converts share premium into share capital without any cash moving.
That is it, outside of a formal reduction of capital or the specific reliefs below. You cannot use it to write off losses by journal entry, to fund dividends, to repay a director's loan, or to buy back shares out of capital without following the proper procedure.
Can share premium be distributed?
No, not directly. Section 830 says a company can only make a distribution out of profits available for the purpose, which in plain terms means accumulated realised profits less accumulated realised losses. Share premium is not profit. Paying a dividend out of it is an unlawful distribution, and a shareholder who knew or should have known can be required to repay it under section 847.
This catches people out more often than you would expect. A director looks at the balance sheet, sees £70,000 of share premium and a positive shareholders' funds figure, and assumes the company has "reserves" to pay a dividend. What matters is the profit and loss reserve alone, which we cover in our guide to retained earnings.
Merger Relief And Group Reconstruction Relief
There are two situations where a premium does not have to be recorded in the share premium account at all.
Merger relief, under section 612, applies when a company acquires at least 90% of the equity of another company in exchange for issuing its own shares. The premium on those shares does not have to go to the share premium account. This matters most when a new holding company is put on top of an existing business, because without the relief a large and permanently locked reserve would be created on day one.
Group reconstruction relief, under section 611, applies to certain transfers between companies in the same group, and limits the amount that has to be credited to share premium.
Both reliefs are technical and the conditions need checking before the deal, not after. If you are planning a holding company structure, speak to us first. Getting this wrong does not usually cost tax, but it can leave a group unable to pay dividends up the chain for years.
How To Reduce Share Premium
If the company needs the share premium released, the route is a reduction of capital under section 641. For a private company there are two options:
- Special resolution supported by a solvency statement. Every director signs a statement that the company can pay its debts now and for the next 12 months. The resolution, solvency statement and a statement of capital are filed at Companies House within 15 days. No court is involved.
- Special resolution confirmed by the court. This is slower and more expensive, and in our view only worth it where a solvency statement cannot honestly be given or where creditors need formal protection.
Under the Companies (Reduction of Share Capital) Order 2008, the reserve created by a solvency statement reduction is generally treated as a realised profit. That means it becomes distributable, or it can be used to wipe out an accumulated deficit on the profit and loss reserve.
Directors should take the solvency statement seriously. Signing one without reasonable grounds is a criminal offence under section 643(4). It is a one page document, but it carries personal weight.
A Worked Example: Brackenfield Robotics Ltd
This example is fictional, but it is built from the pattern we see most often in startups.
Two founders incorporate Brackenfield Robotics Ltd with 100 £1 shares, 50 each, paid in full. Share capital is £100.
In year one an angel investor agrees to put in £75,000 for a 20% stake. The company issues 25 new £1 shares at £3,000 each. After the issue there are 125 shares in total, and 25 of 125 is 20%.
The correct entries are:
- Bank debit £75,000
- Share capital credit £25
- Share premium credit £74,975
Legal fees for the round are £4,200. These are written off against share premium, leaving a share premium account of £70,775.
The company files an SH01 return of allotment within one month of the allotment, as section 555 requires. The SH01 asks for the nominal value of each share and the amount paid on each share including share premium, so it should show £1 nominal and £3,000 paid per share.
What went wrong the first time
In the real versions of this story, the bookkeeping is rarely done this way. The three errors we see most:
- The £75,000 was credited to sales. The accounts then showed a profit that did not exist. For a company that was otherwise profitable, that would have meant £18,750 of corporation tax at 25% on money that was never income.
- The £75,000 was credited to share capital. The accounts showed £75,025 of share capital while Companies House showed 125 £1 shares. Anyone doing due diligence spots that mismatch immediately.
- The £75,000 was posted to the director's loan account because one founder introduced the investor and the money came through their personal account first. The balance sheet then shows the company owing a founder £75,000 that it does not owe.
Each of these is fixable, but the fix gets more expensive the longer it sits, especially once a second funding round is being negotiated on the back of the first year's accounts.
Year three: the dividend problem
By year three, Brackenfield has spent most of the investment on development and built up losses of £52,000 on the profit and loss reserve. Year three itself is profitable, producing £40,000 after tax. The profit and loss reserve is now minus £12,000.
The founders want to pay themselves dividends rather than a higher salary. Shareholders' funds are £58,900 (£125 + £70,775 − £12,000), so on the face of it the company looks healthy.
It cannot pay a penny in dividends. The profit and loss reserve is negative, and share premium is not distributable.
The options are to wait until profits clear the deficit, or to reduce the share premium account. With the investor's agreement, the company passes a special resolution reducing share premium by £30,000, supported by a solvency statement. That creates a £30,000 distributable reserve. After absorbing the £12,000 deficit, there is £18,000 available for a dividend, and the remaining £40,775 stays in share premium as a cushion for creditors.
Whether that is wise depends on cash, not just reserves. Our cash flow forecasting guide covers the check we would run before anyone signs the solvency statement.
Tax Points On Share Premium
For the company, share premium is a capital receipt. It is not trading income and it is not subject to corporation tax.
For the shareholder, the full amount paid for the shares, including the premium, is their base cost for capital gains tax under section 38 of the Taxation of Chargeable Gains Act 1992. An investor who pays £3,000 per share has a base cost of £3,000 per share, not £1.
For SEIS and EIS, the amount subscribed includes the premium. If the company is raising under SEIS or EIS, the investment limits are measured against the full subscription price. The shares must also be fully paid at the time of issue, and that includes the premium.
On a reduction of share premium where cash is returned to shareholders, the repayment is usually treated as a return of capital rather than an income distribution, provided the premium represented new consideration actually paid into the company. That is a capital disposal for CGT purposes, not a dividend for income tax. Where the reduction instead creates a reserve that is later paid out as a dividend, it is taxed as a normal dividend. The difference between those two routes is worth modelling before you pick one.
Our View
Issue founder shares at par and issue investor shares at a premium. That is the normal and correct structure. The temptation to create a large nominal share capital so the company "looks bigger" achieves nothing, and the guide on called up share capital not paid explains the personal risk it creates.
Treat share premium as investor money, because that is what it is. The law locks it in because it is the buffer that protects creditors, and indirectly the investors who paid it. If you need it back, use the proper process and be honest in the solvency statement.
Keep a share premium schedule. For each issue, record the date, class, number of shares, price, premium, and any costs written off. When it comes to valuing the business, a sale, or a later funding round, this schedule saves days of reconstruction from old bank statements.
Do not judge distributable reserves from shareholders' funds. Look at the profit and loss reserve on its own. We would rather see a director check that one figure before every dividend than rely on a headline net assets number.
Frequently Asked Questions
Is share premium an asset?
No. Share premium is part of equity, in capital and reserves. The cash it came from is an asset, but the share premium account itself is a source of funding, not something the company owns.
Is share premium taxable?
Not for the company. It is a capital receipt, not income. For the investor, it forms part of their base cost for capital gains tax.
Can share premium be negative?
No. Share issue costs can only be written off up to the amount in the share premium account. Any excess sits elsewhere in equity, usually the profit and loss reserve.
Does share premium affect return on equity?
Yes, because it increases total equity. A company funded mainly by share premium will often show a low return on equity in its early years even when the business is going well.
Is share premium shown on the confirmation statement?
The confirmation statement includes a statement of capital showing the number of shares, their total nominal value and any amount unpaid. It does not show share premium as a separate figure. The SH01 filed at the time of the issue is where the amount paid including premium is recorded.
How IAK Can Help
Most share premium problems start with a single bank receipt that nobody coded properly. They become serious when the company is profitable, wants to pay dividends, or is preparing for a sale or a second funding round, and discovers the equity side of the balance sheet does not reconcile to what Companies House holds.
We set up the equity accounts correctly when the investment lands, file the SH01, write off issue costs against share premium rather than the P&L, and keep a share history that will survive due diligence. Where a company has accumulated losses and a large share premium account, we can prepare a reduction of capital with a solvency statement so profitable companies can pay dividends again.
Our accounting team handles statutory accounts and Companies House filings. Our tax planning team looks at the share structure, the SEIS and EIS position and how money is best extracted, alongside your director's remuneration. Our bookkeeping team keeps the ledger clean between year ends. We work with a lot of startups and limited companies raising their first outside money.
If you have just closed an investment round, or you are looking at a balance sheet with a share premium figure and no idea what it allows you to do, get in touch for a free consultation.
Sources
- Companies Act 2006, section 610, legislation.gov.uk, on the share premium account, its permitted uses and its treatment as paid up share capital.
- Companies Act 2006, section 611, legislation.gov.uk, on group reconstruction relief.
- Companies Act 2006, section 612, legislation.gov.uk, on merger relief.
- Companies Act 2006, section 580, legislation.gov.uk, on shares not being allotted at a discount.
- Companies Act 2006, section 555, legislation.gov.uk, on the return of allotment.
- Companies Act 2006, section 641, legislation.gov.uk, on reducing share capital.
- Companies Act 2006, section 643, legislation.gov.uk, on the solvency statement and the offence of making one without reasonable grounds.
- Companies Act 2006, section 830, legislation.gov.uk, on distributions being made only out of profits available for the purpose.
- The Companies (Reduction of Share Capital) Order 2008, legislation.gov.uk, on the treatment of reserves arising from a reduction of capital.
- Taxation of Chargeable Gains Act 1992, section 38, legislation.gov.uk, on allowable expenditure for capital gains.
- Return of allotment of shares (SH01), GOV.UK, on reporting new shares to Companies House.