Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you’re raising investment or issuing new shares, you’ll quickly come across the term “share premium.” It’s a straightforward concept, but it has important legal and accounting consequences under UK law.
In this guide, we break down the share premium formula in plain English, show you how to calculate it with easy examples, and flag the key legal rules around creating and using your share premium account under the Companies Act 2006 and UK GAAP (FRS 102).
If you’re planning a funding round or onboarding a co-founder, getting this right from day one will help you avoid compliance headaches later.
What Is Share Premium (And Why It Matters)?
Share premium is the amount paid by an investor for newly issued shares above their nominal (also called “par” or “face”) value. In UK companies, each share has a nominal value (often £0.01 or £1). When you issue shares at a higher price, the excess over nominal must be credited to a special non-distributable reserve called the “share premium account.”
Why it matters:
- It’s legally restricted: You can’t use the share premium account freely for dividends. The Companies Act 2006 sets strict rules on permitted uses.
- It signals valuation: A higher premium typically reflects a higher company valuation and investor confidence.
- It affects filings and records: You’ll need to record share premium correctly in your statutory registers and Companies House filings after each allotment.
If you want a broader overview of the rules and what you can and can’t do with this reserve, it’s worth reading more about share premiums in the UK context.
The Share Premium Formula (With Examples)
The core calculation is simple. There are two common ways to express it, depending on whether you’re looking at premium per share or total premium for the allotment.
Per Share
Share Premium Per Share = Issue Price Per Share – Nominal Value Per Share
Total Premium For The Allotment
Total Share Premium = (Issue Price – Nominal Value) × Number Of Shares Issued
Example 1: Seed Round With £1 Nominal Value
- Nominal value per share: £1.00
- Issue price per share: £5.00
- Number of shares issued: 10,000
Per-share premium = £5.00 – £1.00 = £4.00
Total share premium = £4.00 × 10,000 = £40,000
Book entries (simplified):
- Share capital increases by nominal amount: £1 × 10,000 = £10,000
- Share premium account increases by £40,000
- Cash increases by total subscription proceeds: £50,000
Example 2: Low Nominal Value (Common In Startups)
- Nominal value per share: £0.01
- Issue price per share: £1.01
- Shares issued: 100,000
Per-share premium = £1.01 – £0.01 = £1.00
Total share premium = £1.00 × 100,000 = £100,000
Book entries (simplified):
- Share capital: £0.01 × 100,000 = £1,000
- Share premium: £100,000
- Cash: £101,000
Example 3: No Premium (Issued At Par)
- Nominal value per share: £0.01
- Issue price per share: £0.01
- Shares issued: 1,000,000
Per-share premium = £0.01 – £0.01 = £0
Total share premium = £0 × 1,000,000 = £0
All proceeds go to share capital; no share premium account is created.
Practical Tips When You Set Price And Nominal Value
- Keep nominal value low and consistent: Many early-stage companies set a low nominal value (e.g., £0.01) to keep flexibility as prices rise over time.
- Price per share should reflect your pre-money valuation and the number of shares you plan to issue.
- Document the deal terms: Use a clear Share Subscription Agreement to lock in price, conditions precedent, warranties and investor rights.
How UK Law Treats Your Share Premium Account
Under the Companies Act 2006, amounts credited to the share premium account are generally treated like paid-up share capital and are not available for distribution as dividends. In short: this is a protected reserve.
Permitted Uses (Summary)
Subject to the Companies Act 2006 (and any reliefs that apply), you can typically use share premium for:
- Issuing fully paid bonus shares to existing members
- Writing off preliminary expenses or share/debenture issue costs, commissions and discounts
- Providing for premium payable on redemption of redeemable shares or debentures
Outside of these, the account is restricted. If you want more flexibility, companies sometimes undertake a formal capital reduction process (which requires specific shareholder approvals and filings) so that some reserves can be reclassified as distributable profits.
Accounting Framework
Most UK small companies report under FRS 102 (UK GAAP), where the share premium account appears in equity as a separate reserve. It’s important your bookkeeping mirrors what your Companies House filings say after each allotment.
Key Governance Documents To Check
Before you issue shares at a premium, review the company’s Articles of Association to see how they handle new issuances, pre-emption rights and share classes. It’s equally wise to align the investor terms with your Shareholders Agreement so there’s no mismatch between what’s promised to investors and your internal rules.
Compliance Steps When You Allot Shares At A Premium
Even if the maths is easy, there’s a short legal to-do list every time you issue new shares.
1) Approvals
- Authority to allot: Directors need authority under the Articles or via an ordinary resolution. If you’re disapplying pre-emption rights, you’ll usually also need a special resolution.
- Minutes and resolutions: Record board decisions and any member approvals clearly. If in doubt, revisit the difference between ordinary vs special resolutions to ensure the right threshold is met.
2) Contractual Paperwork
- Subscription terms: A signed Share Subscription Agreement sets the price, payment mechanics, warranties and any investor rights (e.g., information rights, anti-dilution).
- Investor communications: Issue an offer letter or term sheet that aligns with the agreed valuation and timetable.
3) Filings And Registers
- Form SH01: File details of the allotment (including the share premium) with Companies House within the statutory deadline.
- Register of members: Update your statutory register and issue share certificates to the new shareholders.
- Accounts: Ensure your accounting entries show the split between share capital and share premium correctly.
4) Tax And Stamp Duty
- New share issues: There’s no stamp duty on new issues of shares (premium or otherwise).
- Transfers: If shares are later transferred, stamp duty may apply. For context on rates and thresholds, see an overview of Stamp Duty on Shares for UK companies.
Common Scenarios Where The Share Premium Formula Matters
Share premium isn’t just for a big Series A. You’ll encounter it in lots of everyday funding and equity events.
Founders And Co-Founders Joining Later
If a late-joining co-founder subscribes for new shares and pays more than nominal value, the excess is share premium. The share premium formula gives you the reserve impact, but you also need to think about control and future dilution. Where founders are vesting equity or making staged grants, a well-drafted Share Vesting Agreement can help align incentives without triggering unexpected premium movements.
Angel Or Seed Round
Angels subscribing for ordinary shares at £2.00 when nominal is £0.01 create £1.99 per share in premium. That premium goes into the share premium account. Make sure your cap table reflects the fully diluted picture, and ensure the Articles of Association and Shareholders Agreement match the rights investors expect (e.g., pre-emption, drag and tag, information rights).
Convertible Instruments (e.g., ASA/Simple Agreements)
When a convertible instrument (like an ASA) converts into equity at a discount or with a valuation cap, the ultimate issue price per share determines the premium. The math is the same: issue price minus nominal value, times the number of shares issued on conversion. The legal nuance is ensuring the conversion mechanics in the instrument align with your Articles and any investor consents required.
Employee Options And EMI
When options are exercised, the company receives the exercise price. If that price exceeds nominal value, the difference is share premium. Note that any difference between exercise price and fair value at grant/exercise may have separate accounting or tax effects, but the share premium calculation remains: cash received minus nominal, times shares issued. If you’re planning a scheme, consider whether EMI options are suitable from a tax-efficiency standpoint.
Share Buybacks And Redemptions
When redeeming or buying back shares that were originally issued at a premium, the Companies Act allows certain uses of share premium (e.g., providing for redemption premium). Buybacks involve strict processes, filings and funding rules, so it’s wise to map out the accounting and legal steps before committing. For context, see our practical guide to redeeming shares.
Mistakes To Avoid With Share Premium
Even experienced teams slip up on the basics. Here are common pitfalls we see and how to avoid them.
- Treating share premium like cash you can dividend out: It’s a restricted reserve. Unless you complete a lawful capital reduction, you can’t use it for distributions.
- Forgetting pre-emption and authority to allot: Check your Articles. If you need to disapply pre-emption, consider whether a special resolution is required before allotment.
- Not updating registers or filing SH01 on time: This creates compliance risk and misaligns your cap table with legal reality.
- Confusing transfers with new issues: Share premium only arises on new issues. Transfers between shareholders don’t create share premium; they may trigger stamp duty instead.
- Underestimating dilution: New premium inflows can be great, but issuing more shares dilutes others. It’s worth reading up on share dilution to plan ahead.
- Using vague paperwork: Nail down rights and obligations in a robust Share Subscription Agreement and keep your Articles and Shareholders Agreement aligned.
How To Plan Your Next Allotment Step-By-Step
Step 1: Agree Valuation And Price
Confirm the pre-money valuation, number of shares to be issued and issue price per share. Then apply the share premium formula so you know the precise capital vs premium split.
Step 2: Check Your Constitution And Investor Documents
Review the Articles for pre-emption rights, authority to allot and class rights. Confirm that investor terms match your Shareholders Agreement so there are no conflicts.
Step 3: Approvals And Resolutions
Convene a board meeting, approve the terms and fix the allotment. If needed, seek member approval and record it properly. Understanding which matters need special resolutions helps you avoid invalid issuances.
Step 4: Subscription And Completion
Sign the subscription paperwork, receive funds, complete the allotment and issue share certificates. Update the register and file SH01 with Companies House within the deadline.
Step 5: Keep Your Equity House In Order
Maintain clean records and consistent cap tables. If you later undertake a buyback, redemption or bonus issue, ensure your past premiums and reserves are reconciled accurately to support the transaction.
FAQs About The Share Premium Formula
Is Share Premium The Same As Profit?
No. Share premium is an equity reserve that arises from new share issues. It’s not revenue or profit and can’t be distributed like retained earnings without a lawful reduction of capital.
What If I Change Nominal Value?
Altering nominal value (subdivision or consolidation) changes future calculations, but it doesn’t reclassify amounts already in the share premium account. Corporate actions affecting nominal value require proper approvals and filings.
Can I Use Share Premium To Pay Dividends?
Generally no, unless you first complete a permitted process (like a court-approved reduction of capital or use a solvency statement procedure, depending on the type of company and transaction). Always get tailored advice before planning distributions.
Does The Share Premium Formula Change For Different Share Classes?
The formula stays the same. However, different classes (e.g., preference shares) may carry rights that affect valuation and investor preferences. That’s a commercial and legal design question rather than an arithmetic change.
What About Transfers Between Shareholders?
Transfers don’t create share premium for the company because the company isn’t issuing new shares. Instead, consider whether stamp duty on shares is payable by the buyer on the transfer price.
Key Takeaways
- The share premium formula is simple: premium per share equals issue price minus nominal value; total premium equals that difference multiplied by the number of shares issued.
- Amounts credited to your share premium account are legally restricted under the Companies Act 2006 and cannot be used for routine dividends.
- Before you issue shares at a premium, review your Articles of Association and ensure any pre-emption disapplication and allotment authority are properly approved.
- Use a clear Share Subscription Agreement, update your register, issue certificates and file SH01 with Companies House on time.
- Plan ahead for dilution and future corporate actions; keep your cap table and reserves reconciled and consistent with filings.
- If you’re unsure how to structure your round, align investor rights or complete the filings, get tailored advice – it’s far easier to set things up correctly than to fix them later.
If you’d like help calculating share premium, drafting a Share Subscription Agreement or aligning your Articles and shareholder approvals, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.
