If you’re running a Limited company in the UK, you might have come across the term ‘share premium’. But what is it and why does it matter?

Whether you’re issuing new shares, attracting investors, or simply getting to grips with your business finances, understanding what share premiums are can be incredibly useful.

Don’t worry - this won’t be another article that makes your eyes hurt because it’s stuffed full of jargon! We’ll do our best to break down exactly what it is and why you should care in plain English.

So, what is a share premium?

Share premium is the amount a shareholder pays for a share about its nominal value (face value). In other words, if your company issues shares at a price higher than their original nominal value, the excess amount is recorded as share premium in your financial records.

For example, let’s say your company issues shares with a nominal value of £1 each, but investors pay £5 per share. The extra £4 per share is considered share premium. This amount will then be recorded in a separate share premium account on your company’s balance sheet (also known as a Statement of Financial Position). 

Why does it exist?

Companies use share premium for a variety of reasons. Including:

• Companies can raise capital by selling shares at a higher price without changing their nominal value.
• Share premium strengthens the company’s financial position by contributing to reserves.
• Issuing shares at a premium helps maintain a reasonable nominal value while reflecting market demand.

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How to record it in your company accounts

The share premium amount is kept in a share premium account, a separate reserve on your balance sheet. Unlike share capital, this money can’t be used for everyday expenses. It has specific legal uses.

Three examples where it can be used:

1. Covering costs related to issues shares such as legal fees or underwriting costs.
2. It can be used to distribute additional shares to existing shareholders without requiring extra cost.
3. Under specific conditions, share premiums can be used to offset losses or reduce share capital (subject to legal procedures). 

What legal procedures are involved for using it to offset losses?

Reducing share premium to offset losses or reduce share capital involves specific legal procedures. This typically requires shareholder approval and, in some cases, court approval. 

The company must submit a formal resolution to Companies House and ensure the reduction complies with the Companies Act. It’s crucial to follow these steps to ensure the process is valid and legally recognised.
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Share premium vs share capital: what’s the difference?

While they might sound similar, share capital and share premium are different.

For example, if your company issues 1,000 shares at a nominal value of £1 each, your share capital would be £1,000. But if those shares were sold for £3 each, the extra £2 per share (or £2,000 in total) goes into the share premium account.

Do all companies have a share premium account?

No, not all companies will have one. If shares are always issued at their nominal value, there won’t be any share premium to record.However, if a business seeks investment and issues shares at a higher price, a share premium account is necessary to track these funds. 

Can the share premiums be withdrawn?

Unlike profits or retained earnings, share premium isn’t something you can easily withdraw as a dividend or personal income. It’s classified as a non-distributable reserve, meaning it’s subject to very strict legal restrictions on its use.

In certain cases, companies may reduce share premium via a capital reduction process, but this requires compliance with legal procedures and approval from either shareholders or the court. 
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Understanding what it is and how it affects you

While this topic is never going to top the most popular dinner time discussions list, it’s still important for public Limited company owners to understand. Especially if they’re looking to raise investment or issue new shares. 

If you’re unsure how share premium affects your business, or need help managing your accounts, our team at Crunch is here to simplify things for you. With expert accountants and easy-to-use software, we make Limited Company finances easier to navigate so you can focus on what you do best.

Looking for more guidance on share capital, company accounts, or Limited Company finances? Check out our Crunch Knowledge section for expert insights!

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