- A share premium is the amount paid for shares above their nominal value when a company issues new shares.
- Share premium must be recorded in a non-distributable share premium account under UK company law.
- It cannot be used to pay dividends or everyday expenses, only for limited, permitted purposes.
Share premium is the amount paid for shares above their nominal value when a UK limited company issues new shares. It commonly arises during fundraising, investment rounds, or when founders inject additional capital at a value that reflects the company’s growth.
If you are issuing shares or reviewing your company’s equity, getting the treatment right matters. With the right accounting services, you can stay compliant with UK company law and avoid mistakes that affect your balance sheet or future funding.
This guide explains what share premium means in practice, how it differs from share capital, how it must be recorded, and when it can and cannot be used by UK companies.
How does share premium work?
When a UK limited company issues shares, each share has a fixed nominal value. This is usually set very low, such as £1 or £0.01, when the company is formed to allow flexibility as the business grows.
If investors pay more than this nominal value, the excess becomes the share premium. The nominal portion increases share capital, while the remainder is credited to the share premium account. Both appear under equity on the balance sheet, but they are treated differently under company law.
This approach allows companies to raise funds at a fair market value without increasing the number of shares already in issue.
Many founders default to a £1 nominal share value without realising it limits flexibility later. A lower nominal value, such as £0.01, makes it easier to raise funds at a premium without inflating share capital or complicating future investment rounds. Getting this right early reduces legal friction, avoids unnecessary capital restructuring, and keeps your equity structure clean as valuations increase.
What is the difference between share premium and share capital?
Share capital is the total nominal value of all issued shares. It reflects the legal value of the company’s shares and underpins limited liability.
Share premium is the additional amount paid above that nominal value. It does not affect voting rights or ownership percentages, but it strengthens the company’s equity position.
If you want a wider view of how ownership and equity fit together, see our guide on what is equity.
Why do companies issue shares at a premium?
Issuing shares at a premium is common once a business has moved beyond its initial setup phase.
Typical reasons include:
- Raising capital without taking on debt
- Reflecting the true value of the business
- Avoiding unnecessary dilution of existing shareholders
- Strengthening the balance sheet before further growth
Compared with loans or director’s loans, share premium does not create a liability. This can improve how your business looks to investors and lenders. You can also compare this with the wider benefits of equity funding in our guide to the advantages of share capital.
What is a share premium account?
A share premium account is a statutory reserve required under the Companies Act 2006. Any premium received when shares are issued must be recorded here.
It is not a physical bank account. It is an accounting reserve shown within equity on the balance sheet, alongside share capital and retained earnings.
Crucially, the share premium account is classed as non-distributable. This rule exists to protect creditors and maintain capital within the business. The legal basis for this treatment is set out in UK company law, as explained in official guidance on GOV.UK.
What can share premium be used for?
UK law places strict limits on how share premium can be used.
Permitted uses include:
- Writing off costs directly related to issuing shares
- Issuing fully paid bonus shares to existing shareholders
- Certain approved capital restructuring exercises
Share premium cannot be used to:
- Pay dividends
- Cover trading losses
- Fund salaries or routine operating costs
If your company needs access to funds for general use, this must come from retained profits or other financing methods. Incorrect use of share premium can lead to penalties and director liability under Companies House and HMRC rules.
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How is share premium shown in company accounts?
Share premium appears on the balance sheet under equity, separate from share capital. It does not pass through the profit and loss account and is unaffected by day-to-day trading performance.
Once recorded, the balance usually remains unchanged unless the company carries out a formal capital reduction or bonus share issue. Share issues must also be supported by correct documentation, including company share certificates and timely filings with Companies House.
Are there risks or drawbacks to share premium?
Risk or drawback | What it means in practice |
Funds are non-distributable | Share premium cannot be used to pay dividends, salaries, or everyday business expenses. The money is locked into the company’s equity. |
Limited flexibility | Unlike retained profits, share premium cannot be accessed easily if cash flow tightens or priorities change. |
Formal process required to remove it | Reducing or cancelling share premium usually requires a formal capital reduction, which can be time-consuming, costly, and legally complex. |
No automatic repayment to shareholders | Shareholders who paid a premium do not have a right to recover it if shares are sold, transferred, cancelled, or bought back. |
Increased compliance risk | Incorrect use of share premium can lead to Companies House issues, HMRC scrutiny, and potential director liability. |
Planning mistakes can affect future funding | Poorly structured share premiums can complicate later investment rounds, valuations, or shareholder negotiations. |
These risks are why share issues should always be planned carefully and aligned with your company’s long-term funding and ownership strategy.
You can explore this further in our guide on how many shareholders your company can have.
Can shares be issued without a premium?
Yes. A company can issue shares at nominal value, as long as the price is not below that nominal amount.
Shares can also be issued as partly paid or unpaid shares, which creates future payment obligations for shareholders. Existing shareholders can transfer shares at any value, including gifting them, without affecting the share premium account.
The underlying legal rules on issuing shares and maintaining capital are enforced by Companies House and outlined in official GOV.UK guidance.
How Sleek helps you manage share premium correctly
Issuing shares affects your company’s legal structure, accounting records and long-term funding options. Errors can delay investment, trigger compliance issues or create problems later during due diligence.
Sleek supports UK companies with compliant share issues, accurate accounting treatment and clear statutory records. From initial setup to ongoing support, our team helps you raise capital with confidence while keeping your company compliant at every stage.
Fill in the contact form and we will get back to you soonest.
Disclaimer: The preceding information is not legal advice. This content is aimed to provide general guidance. For more formal or legal advice, contact Sleek directly.
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FAQs on share premium
What is a share premium?
A share premium is the extra amount paid for a share above its nominal value when a company issues new shares. If a £1 share is issued for £5, the £4 difference is the share premium. UK companies must record this amount separately in a share premium account as part of shareholders’ equity.
What is a share premium account?
A share premium account is a statutory, non-distributable reserve required under the Companies Act 2006. Any premium received on the issue of shares must be credited to this account. It is not a bank account, but an accounting entry shown under equity on the balance sheet, separate from share capital and retained earnings.
What is share premium on a balance sheet?
On the balance sheet, share premium appears under the equity section, usually alongside share capital. It shows the total amount investors have paid above the nominal value of shares. Share premium does not affect profit or loss and remains unchanged unless reduced through a formal legal process.
What is a share premium in accounting?
In accounting terms, share premium represents capital contributed by shareholders that exceeds the nominal value of shares. It is treated as a non-distributable reserve, meaning it cannot be used for dividends or operating expenses. Its purpose is to protect creditors and preserve company capital.
What is a share premium reserve?
A share premium reserve is another term for the share premium account. It refers to the same non-distributable equity reserve created when shares are issued at a premium. The term “reserve” highlights that the funds are restricted and subject to specific legal rules on how they can be used.
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Can share premium be paid as a dividend?
No. Share premium cannot be paid out as a dividend under UK company law. Dividends can only be paid from distributable profits, not from the share premium account. Using share premium incorrectly can lead to compliance issues and potential director liability.
How does a share premium arise?
A share premium arises when a company issues new shares for more than their nominal value. This usually happens during investment rounds or when a growing business raises capital at a higher valuation. The nominal value increases share capital, and the excess amount becomes the share premium.
