What is share premium?
Share premium is the amount a company receives for newly issued shares above their nominal (par) value, held in a separate share premium account on the balance sheet.
What share premium means
Every share in a UK company has a nominal value, often £1 or 1p, fixed when the shares are created. When a company issues new shares for more than that nominal value, the nominal amount goes to share capital and the excess goes to a separate share premium account. Both sit in the equity section of the balance sheet.
Share premium usually arises when a growing company brings in an investor. The company is worth far more than its nominal share capital, so new shares are issued at a price reflecting that value.
Example
A software start-up was formed with 100 shares of £1 each. Two years later, an angel investor agrees to pay £50,000 for 20 new shares, valuing each share at £2,500.
| Account | Debit | Credit |
|---|---|---|
| Bank | £50,000 | |
| Share capital (20 × £1) | £20 | |
| Share premium (20 × £2,499) | £49,980 |
The company files form SH01 at Companies House within one month of allotting the shares. If the investment qualifies for SEIS or EIS, the investor's tax relief is based on the full £50,000.
What share premium can be used for
Share premium is treated like share capital for legal purposes, so it is protected for creditors. It cannot be paid out as a dividend. It can be used to:
- pay up new bonus shares issued to existing shareholders
- write off the costs of issuing those shares, such as legal fees and commission
To return it to shareholders or turn it into distributable reserves, the company must carry out a formal capital reduction, using a solvency statement or court approval.
Why it matters for your business
When you raise investment, recording share premium correctly keeps your balance sheet and Companies House filings accurate, and makes clear which reserves can and cannot fund dividends. Directors sometimes assume the cash an investor paid can be distributed; it cannot without a capital reduction. Valuation, share rights and tax relief all interact, so plan an investment round with your accountant and solicitor together.
Keep the board minutes, allotment details and SH01 filing together, because investors and buyers will ask for them in due diligence.
Common questions
No. Share premium is not a distributable reserve. Dividends can only be paid from accumulated realised profits. To make share premium distributable, the company must reduce its capital formally, which private companies can do using a solvency statement.
No. Money received for issuing shares is capital, not income, so the company pays no Corporation Tax on it. For the investor, the full amount paid is their base cost for Capital Gains Tax and the figure used for any SEIS or EIS relief.