Illustration only. A company issues 1,000 ordinary shares of £1 nominal value to an investor for £50 each, and pays £2,000 in legal fees on the issue. EntryDebitCredit Bank (cash received)£50,000 Share capital (1,000 x £1)£1,000 Share premium (1,000 x £49)£49,000 Share premium (issue costs written off)£2,000 Bank (fees paid)£2,000 The account ends at £47,000. The £2,000 write off is permitted by section 610(2) because the costs relate to the issue of those very shares; costs of a different issue, or general running costs, cannot be charged against it.

The share premium account

Q: How is share premium treated for tax when it is returned?

HMRC's Company Taxation Manual sets out the main points: Premium counts as capital. Where shares were issued at a premium representing new consideration, the premium is treated as part of the share capital when deciding how much of a later payment is a repayment of capital rather than a distribution (CTA 2010 section 1025; CTM15400). The same applies when the company buys back shares that were issued at a premium (CTM17520). Reduction then dividend. If share premium is cancelled into a reserve and a dividend is then paid from that reserve, the dividend is a distribution under CTA 2010 section 1000(1)A and taxed as income (CTM15440). Direct repayment. If the reduction is paid straight out to shareholders without passing through a reserve, it is a repayment of share capital rather than a distribution, and may be a capital distribution for capital gains tax under TCGA 1992 section 122 (CTM15440). Bonus shares from premium. Where premium representing new consideration is applied in paying up bonus shares, it is treated as new consideration for those shares too (CTA 2010 section 1115; CTM15140), so the bonus issue does not taint a later repayment in the way a capitalisation of profits would. HMRC also notes that the transactions in securities rules can still apply where share capital or premium is reduced and returned, so the choice between a dividend and a capital return should be considered with that in mind.

When a company issues shares for more than their nominal value, the excess must be credited to the share premium account under section 610 of the Companies Act 2006, whether the shares are paid for in cash or in other assets. The account is treated as if it were paid up share capital: it can be used only to write off the expenses and commission of the issue that created it, or to pay up bonus shares, and anything else requires a formal reduction of capital under section 641.

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How does share premium arise?

Every share in a limited company must have a fixed nominal value (section 542), and shares must not be allotted at a discount to it (section 580). There is no upper limit, so once a company has built up value, new shares are normally issued well above nominal. Section 610(1) requires the aggregate premium on those shares to go to the share premium account, and it applies “whether for cash or otherwise”, so a premium paid in goodwill, property or shares in another company counts just as much as cash. Section 582 confirms that shares and any premium may be paid up in money or money’s worth.

The premium appears on the return of allotment (form SH01), which must reach Companies House within one month of the allotment (section 555). The statement of capital filed with it shows the aggregate nominal value and any amount unpaid, including unpaid premium. Public companies have a stricter rule: section 586 requires the whole of any premium to be paid up on allotment. The allotment process is covered in allotting shares.

How is it recorded?

Illustration only. A company issues 1,000 ordinary shares of £1 nominal value to an investor for £50 each, and pays £2,000 in legal fees on the issue.

Entry	Debit	Credit
Bank (cash received)	£50,000
Share capital (1,000 x £1)		£1,000
Share premium (1,000 x £49)		£49,000
Share premium (issue costs written off)	£2,000
Bank (fees paid)		£2,000

The account ends at £47,000. The £2,000 write off is permitted by section 610(2) because the costs relate to the issue of those very shares; costs of a different issue, or general running costs, cannot be charged against it.

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What can the share premium account be used for?

Section 610 allows only two uses without a reduction of capital:

Issue costs. Writing off the expenses of the issue of the shares that created the premium, and any commission paid on that issue (section 610(2)).
Bonus shares. Paying up new shares allotted to members as fully paid bonus shares (section 610(3)). Under article 36 of the model articles for private companies, directors can capitalise a sum standing to the credit of the share premium account if authorised by ordinary resolution, applying it to the members in the proportions a dividend would follow.

Otherwise, section 610(4) applies the rules on reducing share capital as if the share premium account were part of paid up share capital. It cannot fund a dividend: section 830 allows distributions only out of accumulated, realised profits less accumulated, realised losses, and money subscribed for shares is not profit. See how to pay dividends legally.

When is no premium recorded even though shares are issued above nominal value?

Two reliefs override section 610 when one company issues shares to acquire another or to move assets around a group:

Merger relief (section 612). Where the issuing company secures at least a 90% equity holding in another company in exchange for its own equity shares, section 610 does not apply to the premium on those shares.
Group reconstruction relief (section 611). Where a wholly owned subsidiary issues shares to its parent or a fellow wholly owned subsidiary for non cash assets transferred within the group, only the “minimum premium value”, based on the book value of the assets less liabilities assumed, must go to the share premium account.

Section 615 allows the unrecorded premium also to be disregarded in the carrying value of the investment. The detail is in merger relief and group reconstruction relief.

How can share premium be reduced?

Because section 610(4) treats the account as share capital, the reduction routes in section 641 apply:

Solvency statement route. A private company limited by shares can pass a special resolution supported by a solvency statement (section 641(1)(a)). Each director must state 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). The statement must be made no more than 15 days before the resolution (section 642).
Court route. Any limited company can pass a special resolution confirmed by the court (section 641(1)(b)).

On the solvency statement route, within 15 days of the resolution the company must deliver the solvency statement, a statement of capital (form SH19) and a directors’ statement confirming the timing and circulation of the solvency statement, and the reduction does not take effect until registered (section 644). Making a solvency statement without reasonable grounds is an offence.

A reserve arising from a reduction is not distributable unless an order says otherwise (section 654). The Companies (Reduction of Share Capital) Order 2008, article 3, treats it as a realised profit for a private company using the solvency statement route, and for a court approved reduction unless the court orders otherwise. A common use is to convert surplus share premium into distributable reserves to absorb losses or fund dividends or a share buyback. The full procedure is covered in reduction of share capital.

How is share premium treated for tax when it is returned?

HMRC’s Company Taxation Manual sets out the main points:

Premium counts as capital. Where shares were issued at a premium representing new consideration, the premium is treated as part of the share capital when deciding how much of a later payment is a repayment of capital rather than a distribution (CTA 2010 section 1025; CTM15400). The same applies when the company buys back shares that were issued at a premium (CTM17520).
Reduction then dividend. If share premium is cancelled into a reserve and a dividend is then paid from that reserve, the dividend is a distribution under CTA 2010 section 1000(1)A and taxed as income (CTM15440).
Direct repayment. If the reduction is paid straight out to shareholders without passing through a reserve, it is a repayment of share capital rather than a distribution, and may be a capital distribution for capital gains tax under TCGA 1992 section 122 (CTM15440).
Bonus shares from premium. Where premium representing new consideration is applied in paying up bonus shares, it is treated as new consideration for those shares too (CTA 2010 section 1115; CTM15140), so the bonus issue does not taint a later repayment in the way a capitalisation of profits would.

HMRC also notes that the transactions in securities rules can still apply where share capital or premium is reduced and returned, so the choice between a dividend and a capital return should be considered with that in mind.

What are the common mistakes?

Crediting the whole subscription to share capital, or the whole premium to retained earnings.
Forgetting that a premium arises on a non cash issue, such as shares issued for a business or another company’s shares, unless merger or group reconstruction relief applies.
Writing off costs of a different issue, or general professional fees, against the premium.
Paying a dividend that is in substance funded by share premium.
Reducing share premium by board minute alone, without a special resolution, solvency statement and filing.
Filing the SH19 late, so the reduction has not taken effect when the reserve is used.

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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.