Understanding Share Price Premiums: What UK Businesses Need to Know About Issuing Shares

Thinking about raising capital for your UK business by issuing new company shares? If you’re getting ready to bring in investors-whether friends, family, business angels or staff-you’ll likely stumble across the concept of a “share price premium.”

The term sounds technical, but understanding share price premiums is crucial for founders, directors, and anyone involved in a company’s growth. Setting the right share price (including any premium above the share’s face value) can impact tax liabilities, investor relations, company flexibility, and your ultimate success as a business owner.

In this guide, we’ll break down what a share price premium actually is, why it matters, how it works when issuing shares, the requirements under UK law, and some common pitfalls to avoid. By the end, you’ll know how to approach share premiums confidently-and why getting the legal and compliance steps right will set your business up for healthy growth.

If you’re considering a share issue or restructure, read on to get clear on your options, obligations and key decisions.

What Is a Share Price Premium?

When a company issues new shares in the UK, it must decide at what price to sell them. Every share has a “nominal value” (sometimes called face or par value), which is usually set at £1, £0.01 or even £0.0001. But businesses often want to issue shares at a price above this nominal value-this extra amount is the share price premium.

For example, if your shares have a nominal value of £1, but you issue new shares to an investor at £10 per share, the “premium” is £9 per share (the difference between what’s being paid and the nominal value).

This share price premium is a common way to:

• Reflect the true value of a growing or established business (rather than just the nominal value of shares on incorporation)
• Raise more capital without diluting early founders too much
• Comply with legal and tax rules for company accounting and capital maintenance
• Record the extra investment value properly on the company’s balance sheet

In everyday language: a share price premium lets you issue new shares at a higher, more realistic value-while still sticking to the legal framework set out by UK company law.

Why Would a Company Issue Shares at a Premium?

There are several reasons why businesses (especially startups and SMEs) choose to issue shares at a premium:

• Business Growth: If your company’s performed well and investors are betting on future growth, your shares may be worth more than the nominal value. Issuing at a premium reflects that increased value.
• Fundraising: To raise more capital per share, reducing the number of shares given out and limiting dilution of founders or early backers.
• Professionalism: Issuing shares at premium is expected by investors and helps ensure your accounts are tidy, transparent, and compliant.
• Rewarding Staff: When implementing share options or staff incentive schemes, using a realistic issue price (including premium) promotes fairness and clarity.
• Legal Compliance: UK company law has strict rules about treating nominal value and premium separately in your balance sheet and reserves.

Learn more about why issued share capital matters here.

How Do Share Price Premiums Work Under UK Law?

UK company law (mainly the Companies Act 2006) lays out clear rules about share capital, including premiums. When shares are issued above their nominal value:

• The nominal value is credited to the share capital account
• The premium (the extra amount paid) goes into a separate share premium account

These accounts are important for transparency and legal compliance. The share premium account is treated a bit like share capital-it can’t be paid out as dividends or returns to shareholders, except in very narrow circumstances.

This system protects the company’s creditors and ensures extra paid-in capital is kept safe for the business-not siphoned back to shareholders on a whim.

Share Premium Example

Imagine you issue 1,000 new shares at a nominal value of £1 each, but investors pay £5 per share. Here’s how it works:

• £1,000 (1,000 x £1) credited to share capital
• £4,000 (1,000 x £4 premium) credited to share premium account
• Total cash raised: £5,000

This distinction matters for how your company can later use or distribute its capital.

When Should You Set a Share Price Premium?

If you’re wondering when to use a share price premium, here are some of the most common scenarios:

• After Your Business Has Grown or Revalued: If the value of your company has gone up since incorporation (through trading, investment, or IP), new shares should be priced at a level that reflects this-usually at a premium.
• To Attract Investment: Investors expect that new shares will be offered at a price determined by the company’s current value, not its original nominal value.
• When Running Share Option or Staff Incentive Schemes: To comply with HMRC rules on tax efficiency, EMI schemes and similar often require shares to be issued at or around market value (which is typically above nominal value).
• During Fundraising Rounds: Setting the issue price (including the premium) is a key step in negotiating with outside investors-especially in angel, seed, or Series A rounds.
• If You’re Reorganising Share Structure: Introducing new shares for new team members or restructuring ownership often involves creating new classes or issuing shares at a premium to avoid unfair dilution.

It’s smart to get an independent business valuation to support your share price, especially when staff or connected parties are involved, or where HMRC scrutiny may arise.

How to Issue Shares at a Premium - Step by Step

Ready to go ahead? Here’s a practical, stepwise process to making sure you issue shares at a premium compliantly in the UK.

1. Check the Company’s Articles and Shareholder Agreements

First, make sure your company’s articles of association and any shareholders agreements don’t put restrictions on new share issues or require existing shareholders to approve new allocations or set pricing.

2. Get Board Approval

Your board of directors will need to pass a resolution approving the share issue, issue price, and premium. In some cases, shareholder approval may be needed-check your governance documents first.

3. Decide the Share Premium

Determine what the right price per share should be, based on a current valuation. It must not be lower than the nominal value, and the premium should be justified commercially (especially if staff or related parties are investing). You may wish to seek independent advice to avoid disputes and tax issues.

4. Update Statutory Registers and Companies House

Once shares are allocated, update your company’s register of members and any statutory filing requirements (like submitting a return of allotment - Form SH01) to Companies House. The premium should be clearly shown as being credited to the share premium account.

5. Issue Share Certificates and Records

Provide share certificates to the new shareholders. Keep internal documentation showing the board’s approval, valuation basis, offer documentation, and ledger entries for share capital and share premium.

It’s wise to have a lawyer guide you through this process to avoid accidental errors-incorrectly issued shares can lead to disputes, tax problems, or even invalidate the issue.

How Does the Share Price Premium Affect Company Accounts and Tax?

The share premium account is classed as a “non-distributable reserve.” Put simply-it can’t be used to pay dividends to shareholders, except under specific court-approved circumstances. This ring-fencing of share premium helps protect company capital and creditors.

From a tax perspective:

• There is usually no corporation tax liability for the company on share premium received (it’s not income-it’s capital).
• If offering shares to employees or connected persons at below market value (i.e., not enough premium is charged), this can trigger an income tax charge on the difference-so be careful to set fair premiums and properly document valuations.
• The share premium must be properly recorded in your company’s annual accounts, and Companies House filings must be accurate and timely.

Get your accountant or legal expert to double check you’re meeting these rules-especially with staff share schemes, incentive plans, or unusual share classes.

Key Legal Documents Needed When Issuing Shares at a Premium

Some essential legal paperwork to make your share issue and premium rock-solid:

• Board and shareholder resolutions approving the issue and price
• A robust Share Subscription Agreement (for new investors coming in)
• Updated Shareholders Agreement and Articles of Association
• Proper company registers and share certificates
• HMRC paperwork (if you’re running share option schemes or need to notify new share issues)

Don’t risk using generic templates-share issues and premiums have to be tailored to your business, structure, and future growth plans. An expert can make sure you’re protected from day one.

What Are the Risks of Getting Share Premiums Wrong?

There are serious consequences if you mishandle a share price premium or issue shares incorrectly, including:

• HMRC investigations and potential tax bills (especially if shares are issued below fair market value)
• Company law breaches, which can invalidate share issues or expose directors to liability
• Shareholder disputes over valuation, ownership, and voting rights
• Difficulty attracting future investment, due diligence red flags, or loss of credibility with professional investors
• Potential fines, forced returns of capital, or the need for costly legal rectification

To avoid these pitfalls, set up your legal foundations early and review your approach with a commercial lawyer who understands company capital structures.

Can Share Premium Be Used For Anything?

No. The share premium account is strictly regulated. You cannot use it for:

• Paying dividends directly to shareholders
• Distributing it as profits
• Returning capital to shareholders, except in very specific circumstances such as a reduction of capital (which needs a special process and usually court approval)

But you can use the share premium account for a few things, such as:

• Writing off preliminary company expenses or certain issue costs
• Issuing bonus shares (free shares) to existing shareholders
• Permitted capital reductions (with proper documentation and approvals)

Learn more about reducing share capital here if you think this might apply to you.

Should You Seek Professional Advice Before Issuing Shares at a Premium?

Definitely! Every business is unique and getting this wrong can have significant legal, tax, and commercial consequences far into the future.

We strongly recommend:

• Talking to a legal expert before issuing shares (especially at a premium)
• Working with a commercial accountant or tax advisor
• Having all documents professionally drafted and checked

If you’re not sure where to start-or what documents your business specifically needs-chatting to an expert will ensure your next steps are safe, smart, and geared for growth. You can read more about share premium account rules here.

Key Takeaways

• A share price premium is the amount paid for a new share above its nominal value-it reflects your business’s real worth and is a crucial fundraising tool.
• Share premium must be treated separately in your company's accounts, credited to a strict share premium account that can’t be easily distributed.
• Always review your company’s articles, shareholder agreements, and board minutes before issuing shares-with professional input where needed.
• Handle all statutory filings and share certificates accurately to avoid disputes or penalties.
• Getting professional legal and accounting guidance is essential to stay compliant and unlock your business’s growth potential.

If you’d like expert support around issuing shares, share price premiums, or growing your company safely, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat. We’re here to help you build strong legal foundations-right from the start.