Can a dividend be paid out of share premium

Q: How is the money taxed when it reaches shareholders?

It depends on the route, as HMRC explains at CTM15440: Dividend paid from the reserve. A payment by way of dividend from the reserve is a distribution under section 1000(1)A of the Corporation Tax Act 2010, taxed on individual shareholders as dividend income. No part of a later distribution from the reserve is treated as a repayment of capital on the shares that were cancelled to create it. Repayment without passing through a reserve. Where the reduction is paid straight to shareholders, it is a repayment of share capital rather than a distribution, and may be a capital distribution for capital gains tax under section 122 of the Taxation of Chargeable Gains Act 1992.

No. Share premium is treated as if it were paid up share capital, and a dividend can only be paid out of profits available for distribution, which share premium never is. The way to use it is a formal reduction of capital: a private company can cancel share premium by special resolution supported by a directors’ solvency statement, or any company can do so with court approval, and the reserve that results is then treated as a realised profit that can support a dividend once the reduction has taken effect.

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Why is share premium not available for dividends?

Section 610 of the Companies Act 2006 requires the excess over nominal value on an issue of shares to be credited to the share premium account. Subsections (2) and (3) allow only two uses: writing off the expenses and commission of that issue, and paying up fully paid bonus shares. Subsection (4) then applies the rules on reducing share capital as if the account were part of paid up share capital. A dividend is neither of the permitted uses.

Section 830 says a company may only make a distribution out of profits available for the purpose, defined as accumulated realised profits not previously distributed or capitalised, less accumulated realised losses not previously written off in a reduction or reorganisation of capital. Money subscribed by investors is capital, not profit. For a public company, section 831(4)(a) also lists the share premium account as an undistributable reserve for the net assets test. The background is in the share premium account and distributable reserves.

Why does this come up in companies with plenty of cash?

Because cash and distributable profits are different things. A typical case is a company that raised money from investors at a high price per share, spent several years building its business at a loss, and is now profitable with cash in the bank. Its balance sheet shows a large share premium account and a deficit on retained earnings. Section 830 nets the accumulated realised losses against realised profits, so until the deficit is cleared there is nothing to distribute, however much cash is held and however large the premium.

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What happens if a dividend is paid out of share premium anyway?

It is an unlawful distribution. Section 847 makes a shareholder who knew, or had reasonable grounds for believing, that the distribution breached Part 23 liable to repay it. HMRC’s Company Taxation Manual at CTM15205 says that in a private company controlled by director shareholders it expects section 847 to apply in most cases, that the dividend is then void for income tax, and that for a close company the amount is treated as a loan to the participator under section 455 of the Corporation Tax Act 2010 until it is repaid. Directors face personal exposure too; see unlawful dividends and director liability.

How does a capital reduction create distributable reserves?

Section 641(1) allows a limited company to reduce its share capital, and through section 610(4) its share premium, in two ways:

a private company limited by shares, by special resolution supported by a solvency statement (sections 642 to 644);
any company, by special resolution confirmed by the court (sections 645 to 651).

Section 654(1) says a reserve arising from a reduction is not distributable unless an order provides otherwise. Article 3 of the Companies (Reduction of Share Capital) Order 2008 provides that a reserve arising on a private company reduction supported by a solvency statement, and not subject to a court application, is treated as a realised profit for Part 23. For a court confirmed reduction the reserve is treated as a realised profit unless the court orders otherwise. Article 3(4) preserves any contrary provision in a court order or undertaking, the resolution itself, or the articles. Section 641(6) also makes the procedure subject to any restriction or prohibition in the articles. The full procedure is in reduction of share capital.

In what order must the steps happen?

Check the articles allow a reduction and the resolution does not restrict the use of the reserve.
Each director makes the solvency statement no more than 15 days before the resolution is passed (section 642(1)). It states that there is no ground on which the company could be found unable to pay its debts and that it will be able to pay its debts as they fall due over the following year, taking contingent and prospective liabilities into account (section 643).
For a written resolution, a copy of the statement goes to every eligible member with the resolution (section 642(2)).
Within 15 days of the resolution, deliver to Companies House the solvency statement, a statement of capital and the directors’ confirmation of timing and circulation (section 644(1) and (5)).
The reduction does not take effect until those documents are registered (section 644(4)). For a court reduction, it generally takes effect on registration of the order and statement of capital (section 649(3)).
Only then consider the dividend, by reference to the relevant accounts. If the last annual accounts do not show enough distributable profits, which they will not when the reserve arose afterwards, the dividend may be justified by interim accounts under section 836(2)(a). See relevant accounts for distributions.

A director who makes a solvency statement without reasonable grounds for the opinions in it commits an offence if it is delivered to the registrar, punishable on indictment by up to two years’ imprisonment, a fine or both (section 643(4) and (5)).

Does the new reserve first have to absorb past losses?

In effect, yes. Because the reserve is treated as a realised profit, it sits in the section 830 calculation alongside the accumulated realised losses, and only the net figure is available. A company with a large deficit may need to cancel more premium than the dividend it has in mind.

Illustration only. A company issued shares for £200,000, of which £1,000 is nominal value and £199,000 share premium. Its last annual accounts show accumulated realised losses of £120,000, and it has made realised profits of £30,000 since. It cancels £150,000 of share premium using the solvency statement route.

Item	£
Reserve arising on reduction (realised profit)	150,000
Accumulated realised losses at last year end	(120,000)
Realised profits since, per interim accounts	30,000
Profits available for distribution	60,000

Share premium falls to £49,000. The bookkeeping is covered in accounting for a capital reduction.

How is the money taxed when it reaches shareholders?

It depends on the route, as HMRC explains at CTM15440:

Dividend paid from the reserve. A payment by way of dividend from the reserve is a distribution under section 1000(1)A of the Corporation Tax Act 2010, taxed on individual shareholders as dividend income. No part of a later distribution from the reserve is treated as a repayment of capital on the shares that were cancelled to create it.
Repayment without passing through a reserve. Where the reduction is paid straight to shareholders, it is a repayment of share capital rather than a distribution, and may be a capital distribution for capital gains tax under section 122 of the Taxation of Chargeable Gains Act 1992.

Are other reserves treated like share premium?

Not all of them. TECH 02/17BL, the ICAEW and ICAS guidance on distributable profits, says a merger reserve recorded where merger relief applies is in law a profit, initially unrealised, that becomes realised in a similar way to a revaluation reserve (paragraph 2.11). A capital contribution received in the form of qualifying consideration is a realised profit (paragraph 3.14(c)). The capital redemption reserve, by contrast, is treated as share capital in the same way as share premium. Labels on the balance sheet do not decide the question; the source of each reserve does.

What mistakes come up most often?

Treating total equity, including share premium, as the dividend capacity.
Paying the dividend before the reduction documents are registered.
Relying on the last annual accounts when the reserve arose after them.
Forgetting that accumulated losses absorb the new reserve first.
Signing a solvency statement without proper cash flow forecasts.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.