What is Share Premium?
Share premium is the amount paid by investors for shares above their nominal (par) value. It is recorded in a separate share premium account on the balance sheet and has legal restrictions on how it can be used.
Example
Your company has shares with a nominal value of £0.01 each. An SEIS investor pays £10.00 per share. The share premium is £9.99 per share. If they buy 10,000 shares, the share capital increases by £100 (10,000 x £0.01) and the share premium account increases by £99,900 (10,000 x £9.99).
How Share Premium Works in Practice
When a company issues new shares at a price above their nominal value, the excess is classified as share premium. In the UK, the nominal value (also called par value) is the minimum price at which shares can be issued - it is set in the articles of association or at incorporation and is typically a small amount like £0.001, £0.01, or £1.00. The actual price at which shares are sold to investors (the issue price or subscription price) is almost always significantly higher, especially in SEIS and EIS investment rounds where the company is valued at much more than its nominal share capital.
The share premium account is a specific reserve on the company's balance sheet, governed by Section 610 of the Companies Act 2006. Unlike retained earnings, the share premium account has legal restrictions on its use. It can only be applied to: issuing fully paid bonus shares to existing shareholders; writing off the expenses of or commission paid on the share issue; writing off the costs or discount on any issue of debentures; and providing the premium payable on redemption of debentures or preference shares. Crucially, it cannot be distributed as dividends to shareholders.
For SEIS and EIS purposes, the share premium is an important component of the investment and the company's valuation. When HMRC reviews advance assurance applications and compliance statements, they consider the total investment amount (nominal value plus premium) to check against the relevant fundraising limits. The share premium also affects the gross assets test, as it increases the company's total assets immediately after the share issue.
Directors and founders should understand that a large share premium account can sometimes create complications. If the company needs to reduce its share capital or return money to shareholders in the future, the share premium account adds complexity to the process. A reduction of share capital that includes the share premium account requires either a court order or a solvency statement from the directors, depending on the method used.
Step by Step
When shares are issued to investors, the company's accountant records the transaction in two parts. The nominal value of the shares issued goes to the share capital account, and the excess (the premium) goes to the share premium account. Both appear in the equity section of the balance sheet.
For example, if a company issues 25,000 shares with a nominal value of £0.01 at a subscription price of £10.00 per share (total investment £250,000): share capital increases by £250 (25,000 x £0.01) and the share premium account increases by £249,750 (25,000 x £9.99). The total equity injection is £250,000, but it is split across the two accounts for legal and accounting purposes.
Practical Tips
- Set your company's nominal share value low (£0.001 or £0.01) at incorporation to give maximum flexibility for future share issues at varying prices
- When raising SEIS/EIS investment, ensure the total subscription price (nominal value plus premium) reflects a defensible valuation that can withstand HMRC scrutiny
- Include the share premium account movement in your board minutes when authorising share issues, and record it correctly in the statutory accounts
- If you need to use the share premium account in the future (e.g., for a capital reduction), budget for professional legal advice as the process has strict requirements
- Remember that share premium adds to gross assets - factor this into your SEIS gross assets calculation if you are near the £350,000 threshold
Common Mistakes to Avoid
- Treating the share premium account as distributable reserves and paying it out as dividends, which is illegal under the Companies Act
- Not understanding that share premium increases the company's gross assets, which can push an SEIS company over the £350,000 threshold immediately after the share issue
- Setting the nominal value too high (e.g., £1.00 per share) which limits flexibility in future share issues and can create issues if the company needs to issue shares at a lower price
- Confusing share premium with retained earnings in the accounts, leading to incorrect distributable reserves calculations
- Not recording the share premium separately from share capital in the company's statutory accounts, which is a legal requirement
Frequently Asked Questions
Can share premium be paid out as dividends?
No. Share premium is not a distributable reserve and cannot be paid to shareholders as dividends. It can only be used for specific purposes allowed by the Companies Act 2006: issuing bonus shares, writing off share issue costs, and providing for debenture premiums. To distribute share premium, the company would need a formal capital reduction.
Why do companies set a low nominal value for shares?
A low nominal value (such as £0.001 or £0.01) gives maximum flexibility. Shares cannot be issued below their nominal value, so a high nominal value restricts the minimum issue price. With a low nominal value, the company can issue shares at any price the market will bear. This is particularly important for startup companies whose valuation may fluctuate.
Does share premium affect SEIS/EIS eligibility?
The share premium itself does not affect eligibility, but the total investment (nominal value plus premium) counts towards the SEIS £250,000 and EIS £5 million annual limits. The share premium also increases gross assets after the share issue, though the gross assets test is measured immediately before the issue for both SEIS and EIS.
How is share premium shown in the accounts?
Share premium appears as a separate line item in the equity section of the balance sheet, distinct from share capital and retained earnings. In the Companies House annual accounts, it must be disclosed separately. The notes to the accounts should show movements in the share premium account during the year.
Source: Companies Act 2006 s610 - Share Premium
Related Terms
SEIS is a UK government scheme that offers investors 50% income tax relief, CGT exemption, and loss relief when they invest in qualifying early-stage companies. Companies can raise up to £250,000 under SEIS.
EIS is a UK government scheme that offers investors 30% income tax relief, CGT deferral, CGT exemption after 3 years, and loss relief when they invest in qualifying companies. Companies can raise up to £5 million per year under EIS.
An angel investor is a high-net-worth individual who invests their own money into early-stage companies, typically in exchange for equity. UK angel investors frequently invest through SEIS and EIS to benefit from significant income tax relief, CGT exemption, and loss relief.
A qualifying trade is a trade that is eligible for SEIS and EIS tax relief. The legislation works on an exclusion basis: most trades qualify unless they are on the list of specifically excluded activities such as property development, financial services, and legal or accountancy services.
Advance assurance is a confirmation from HMRC that a company should meet the conditions for SEIS or EIS, based on the information provided. It gives investors confidence that their investment will qualify for tax relief before they commit their money.
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