A bonus issue, also called a capitalisation or scrip issue, turns a company’s reserves into new fully paid shares issued to existing members in proportion to their holdings, with no cash paid. Under the model articles the directors need an ordinary resolution authorising the capitalisation, plus authority to allot the shares, and the company files a return of allotment (SH01) within one month.

What is a bonus issue and why make one?

In a bonus issue the company takes an amount from a reserve, credits it to share capital and issues new shares credited as fully paid. Net assets do not change and nothing leaves the company. Section 829(2)(a) of the Companies Act 2006 confirms that an issue of fully or partly paid bonus shares is not a distribution, so the distributable profit rules that govern dividends do not restrict it in the same way.

Companies use bonus issues to:

  • increase issued share capital, for example to meet a contract or regulatory capital requirement or to look stronger on the public register;
  • increase the number of shares in issue before an investment round or employee share scheme, without changing anyone’s percentage;
  • use up a share premium account or capital redemption reserve that otherwise has limited uses; or
  • as a step in a wider reorganisation, sometimes followed by a reduction of share capital.

Which reserves can be capitalised?

Article 36 of the model articles for private companies lets the directors, if authorised by ordinary resolution, capitalise:

  • any profits of the company, whether or not they are available for distribution, which are not required for paying a preferential dividend;
  • any sum standing to the credit of the share premium account; and
  • any sum standing to the credit of the capital redemption reserve.

The Act permits the last two directly: section 610(3) allows the share premium account to pay up new shares allotted to members as fully paid bonus shares, and section 733(5) does the same for the capital redemption reserve. These are among the few uses of those reserves that do not need a formal reduction of capital. See the share premium account.

Because article 36 extends to profits that are not available for distribution, unrealised profits can be capitalised into bonus shares even though they could not be paid out as a dividend. Article 36(4) is narrower: only a capitalised sum taken from profits available for distribution may be used to pay up new debentures rather than shares. Companies with bespoke articles should check the wording, as older or tailored articles may restrict which reserves can be used.

What authority is needed?

Authority to capitalise

Under article 36(1) of the private company model articles, the decision is the directors’, but only once an ordinary resolution has authorised it. An ordinary resolution is passed by a simple majority (section 282). Article 78 of the public company model articles is in the same terms and also allows capitalised distributable profits to pay up amounts unpaid on existing shares.

Authority to allot

A bonus issue is an allotment, so the directors also need power to allot under section 549. In a private company with only one class of shares, section 550 gives that power unless the articles prohibit it. Otherwise the directors need authority under section 551, given by the articles or by ordinary resolution, stating the maximum number of shares and an expiry date not more than five years away. A section 551 resolution must be filed at Companies House within 15 days (sections 551(9) and 30). For the general rules see allotting shares.

Pre emption

Section 564 disapplies the statutory pre emption right for bonus shares, so no offer to existing members or disapplication resolution is needed. The issue is proportionate anyway: article 36(2) requires capitalised sums to be applied for the persons who would have been entitled to them as a dividend, in the same proportions.

How does the process work step by step?

  1. Confirm from up to date accounts or management figures that the reserve to be used is large enough.
  2. Check the articles and any shareholders’ agreement for restrictions or class consents.
  3. Pass the ordinary resolution authorising capitalisation, and any section 551 resolution needed.
  4. Hold a board meeting to resolve to capitalise the stated sum and allot the shares credited as fully paid. Article 36(5) lets the directors deal with fractions, for example by cash payments.
  5. Enter the new shares in the register of members and issue certificates.
  6. File SH01 within one month (section 555). The form expressly covers bonus shares and needs a statement of capital.

For a public company, section 593(2) confirms that applying reserves to pay up shares allotted to members is not consideration, so no independent valuation report is needed.

How is a bonus issue accounted for?

The entry is a transfer within equity: debit the reserve used (retained earnings, share premium or capital redemption reserve) and credit share capital with the nominal value of the new shares. There is no profit or loss, no cash movement and no change in total equity. Retained earnings that have been capitalised are no longer available for future dividends.

How are shareholders taxed on a bonus issue?

For capital gains, section 126(2)(a) of the Taxation of Chargeable Gains Act 1992 treats an allotment to existing holders in proportion to their holdings as a reorganisation. HMRC’s Capital Gains Manual at CG51746 names bonus issues as one of the most common types. Under section 127 there is no disposal and no acquisition: the bonus shares join the original holding and share its original cost and acquisition date (CG51805).

A bonus issue of ordinary shares is not usually income. The exceptions are where the tax rules treat the issue as a distribution:

  • Stock dividends. Where shareholders choose shares instead of a cash dividend, the shares are treated as income under section 410 of the Income Tax (Trading and Other Income) Act 2005 and are not a reorganisation (CG58750).
  • Bonus redeemable shares or securities. The part of the issue not for new consideration is a distribution under section 1000(1) C and D of the Corporation Tax Act 2010 (CTM15450). See redeemable shares.
  • Bonus issue after a repayment of capital. Section 1022 treats the amount paid up as a distribution, up to the amount of share capital previously repaid.
  • Later repayment of bonus shares. Under section 1026, a later repayment of share capital that was issued as a bonus is not treated as a repayment of capital until earlier bonus issues are exceeded, so it is taxed as a distribution (CTM15400).

What does a bonus issue look like in numbers?

Illustration only. A company has 1,000 ordinary shares of £1 and a share premium account of £9,000. It makes a nine for one bonus issue using the share premium account.

Before After
Share capital £1,000 £10,000
Share premium £9,000 £0
Total of these £10,000 £10,000

A shareholder who held 100 shares, bought for £5,000, now holds 1,000 shares. For capital gains the 1,000 shares have a total base cost of £5,000 and are treated as acquired when the original 100 were.

What are the common mistakes?

  • Allotting without the ordinary resolution required by the articles, or without section 551 authority where the company has more than one class.
  • Capitalising profits needed to pay an arrears of preferential dividend.
  • Issuing bonus shares to only some members, which is not a proportionate issue and needs a different analysis.
  • Issuing redeemable bonus shares, or repaying bonus shares soon after, without considering the distribution rules.
  • Confusing a bonus issue with a scrip dividend, which is taxed as income.
  • Forgetting to file SH01, so the statement of capital on the register is wrong. Dividend procedure itself is covered in how to pay dividends legally.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.