Can a UK company hold a seven-figure equity reserve yet be barred from paying a single penny of it out as a dividend? That is the everyday reality of the share premium account that arises when shares are issued above their nominal value.
In this guide, we discuss how share price premium accounting works under FRS 102. We cover the share issue journal entry, a worked example, permitted uses, the statutory exemption and formal capital reductions.
It is a non-distributable equity reserve that holds the excess of the amount investors pay for shares over those shares' nominal value.
Nearly every UK company that raises equity at a valuation above par value creates a share premium without giving it a second thought. Subject to group reconstruction relief, merger relief and regulations, section 610 of the Companies Act 2006 requires premiums on issued shares to be transferred to the share premium account. The rule applies to companies subject to the relevant Companies Act provisions, and the reserve is treated as paid-up share capital for most statutory purposes. Founders wondering why set up a company in the United Kingdom can review the types of business entities to set up in the UK.
FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland, is issued by the Financial Reporting Council (FRC). Its financial instruments guidance classifies the proceeds of equity issues as equity rather than liabilities, measured net of the transaction costs of issuing them. Both the nominal amount and the premium therefore sit within equity on the balance sheet.
The £0.01 ordinary share remains the most common building block. When an investor pays £1.50 for a £0.01 share, £0.01 strengthens share capital and the remaining £1.49 strengthens the share premium account. Neither figure may be distributed as a dividend.
The FRC revised FRS 102 through its periodic review, with the updated standard effective for accounting periods beginning on or after 1 January 2026. The mechanics of equity presentation are unchanged, but companies should prepare their accounts under the current edition.
| Component | Amount | Where it is recorded | Distributable? |
|---|---|---|---|
| Nominal (par) value | £1,000 | Share capital | No |
| Excess over par value | £149,000 | Premium reserve within equity | No |
| Transaction costs of the issue | £3,000 | Deducted from the premium reserve | n/a |
Debit bank with the full cash received, credit share capital with the nominal value only, and credit the premium reserve with the excess.
The double entry is simple once the components are separated, and the same steps apply whether the subscriber is a founder or an institutional investor. The reserve is a legal distinction, so the split must be exact rather than a presentation preference.
A worked example makes the mechanics concrete. Suppose a UK company allots 100,000 ordinary shares of £0.01 each at a subscription price of £1.50 per share, incurring £3,000 of legal and registration fees. The table below shows the entries after the steps are applied.
The Companies Act 2006 also prohibits issuing shares at a discount, so the premium can never be negative at the point of issue. Where the subscription price equals par, no premium arises and the entire proceeds are credited to share capital.
In practice, we help clients set up their chart of accounts at incorporation. The share capital and premium lines then appear correctly in the first set of FRS 102 accounts. Getting this right early avoids restatements when banks, investors or credit insurers later review the filed accounts.
Step 1: Debit Bank With the Full Proceeds
Record the gross cash received from subscribers. In the worked example, this is 100,000 shares multiplied by £1.50, giving a debit of £150,000.
Step 2: Credit Share Capital at Nominal Value
Only the par value of the shares goes to share capital. Here, 100,000 shares at £0.01 each produces a £1,000 credit.
Step 3: Credit the Premium Reserve With the Excess
The share premium is the balance of the proceeds after nominal value. In this example, it is £150,000 less £1,000, or £149,000 of non-distributable equity.
Step 4: Absorb Issue Costs Into Equity
Under FRS 102, the transaction costs of an equity issue are deducted from the proceeds within equity. The £3,000 of fees is debited to the share premium account, not expensed through profit or loss. After absorbing the issue costs, the share premium account stands at £146,000 (£149,000 gross premium less £3,000 fees).
| Account | Debit | Credit |
|---|---|---|
| Bank (100,000 shares at £1.50) | £150,000 | — |
| Share capital (100,000 × £0.01) | — | £1,000 |
| Share premium | — | £149,000 |
| Share premium (issue costs absorbed) | £3,000 | — |
| Bank (issue costs paid) | — | £3,000 |
Permitted uses include:
- Bonus issues of fully paid shares
- Absorbing the costs of an equity issue
- Court-approved reductions of capital
Group reconstruction relief under section 611 and merger relief under section 612 can disapply or limit the section 610 share premium requirement in qualifying transactions.
Dividends remain strictly prohibited.
The reserve is capital in substance, so the law fences off anything that resembles a distribution. Companies House publishes company share capital guidance for companies covering allotments, transfers and reductions. It is the practical companion to the statutory rules summarised below.
Dividends may only be paid out of distributable profits, and the share premium account sits outside that pool entirely. Attempting to dress up a distribution as a reduction of the reserve will not withstand scrutiny, and directors can face personal liability for unlawful payments.
1. Bonus Issues of Shares
The reserve can be capitalised into new fully paid shares issued free to existing members. No cash leaves the company; share capital rises and the premium falls by the same amount.
2. Absorbing the Costs of an Equity Issue
Legal, registration and professional fees connected with issuing shares can be written off against the reserve. This mirrors the FRS 102 requirement to measure equity proceeds net of transaction costs.
3. Group Reconstruction and Merger Relief Affect the Premium Requirement
Group reconstruction relief under section 611 and merger relief under section 612 can affect whether section 610 applies, while section 615 addresses their balance-sheet effect. They are not ordinary uses of an existing share premium reserve. Those statutory conditions apply only to qualifying share-for-share transactions, not to every share issue.
4. Capital Reductions
A capital reduction can reorganise the reserve or create distributable profits. Private companies may generally use a special resolution supported by a solvency statement, while court confirmation is an alternative route. Creditor protection and evidence of solvency remain important. Legal and accounting advice is needed.
| Use | Status |
|---|---|
| Bonus (capitalisation) issue of fully paid shares | Permitted |
| Absorbing the costs of issuing shares | Permitted |
| Merger relief adjustments on share-for-share acquisitions | Permitted |
| Court-approved reduction of capital | Permitted |
| Paying dividends or other distributions | Prohibited |
| Lending to shareholders or funding withdrawals | Prohibited |
How Do Group Reconstruction and Merger Relief Work Under FRS 102?
Qualifying group reconstructions and mergers may receive relief from section 610 under sections 611 and 612, while FRS 102 governs the related accounting treatment.
There is no section 612A in the Companies Act 2006. The relevant company-law relief provisions are sections 611 to 615. In a qualifying group reconstruction, section 611 can reduce the amount that section 610 requires to be credited to the share premium account. In a qualifying merger, section 612 disapplies section 610 to premiums on shares issued under the arrangement.
FRS 102 does not create a statutory exemption. It sets the accounting requirements for the transaction. Where an investment is accounted for at cost in separate financial statements, section 615 may allow the initial carrying amount to be reduced in qualifying cases. The relief does not automatically make any reserve distributable; that still depends on the Companies Act distributable-profits rules.
In practice, we find most companies still maintain the reserve even when relief applies. It keeps the balance sheet familiar to banks, investors and credit insurers, and it simplifies comparisons across periods. The relief matters mainly in group reorganisations and share-for-share acquisitions.
Overseas shareholders should also note how the relief interacts with group structuring. This is covered in a comprehensive guideline for foreigners to start a business in the United Kingdom. A share issue is usually the first accounting event a new UK entity records. The presentation choice deserves an early decision.
A private company can generally reduce the reserve using a special resolution and solvency statement, subject to statutory requirements.
Private companies limited by shares may generally use a special resolution supported by a solvency statement to reduce capital. The Companies Act 2006 sets statutory requirements for that route. Subject to those requirements, it can create distributable reserves without court confirmation. Capital reductions require legal and accounting advice.
Companies House registers the resolution, the court order and any amended articles, and the changes appear on the public record. Banks and investors routinely check that record before advancing credit, so accuracy at the first attempt avoids awkward questions later.
We help clients plan reorganisations so that statutory filings, journal entries and the confirmation statement all tell the same story. Teams unsure where to start can reach our specialists through our contact page before committing to a route.
Conclusion
The share premium account, or share price premium, arises whenever a UK company issues shares above their nominal value. Subject to qualifying relief under sections 611 and 612 and applicable regulations, section 610 of the Companies Act 2006 requires the excess to be held as non-distributable equity. FRS 102 presents both elements within equity, measured net of the transaction costs of the issue.
The reserve can fund bonus issues, absorb issue costs and support merger relief. A private company may generally use a solvency-statement capital reduction to create distributable reserves. Statutory requirements apply. The 2026-effective edition of FRS 102 leaves these mechanics unchanged, though accounts should be prepared under the current version of the standard.
As a Corporate Services Provider, 3E Accounting United Kingdom supports start-ups, SMEs and multinationals. Our services cover incorporation, corporate secretarial, accounting and tax compliance across the UK. Our team supports first share issue journal entries and planned capital reductions with professional expertise. Technology-enabled processes help clients grow with confidence.
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Frequently Asked Questions
No. The reserve is treated as part of paid-up share capital and is non-distributable. Dividends may only be paid from distributable profits. A private company may, subject to statutory requirements, use a capital reduction backed by a solvency statement to create distributable reserves. Legal and accounting advice is required.
The share premium account is required by company law, not by FRS 102 itself. There is no section 612A in the Companies Act 2006. Qualifying group reconstruction relief under section 611 and merger relief under section 612 can modify or disapply the section 610 requirement, while FRS 102 governs the related accounting treatment.
Transaction costs of an equity issue are deducted from the proceeds within equity. They are debited to the premium reserve rather than expensed through profit or loss.
Yes. The reserve may be capitalised into new fully paid shares issued free to existing members. Share capital increases and the premium falls by the same amount, with no cash leaving the company.
The Companies Act 2006 prohibits issuing shares at a discount, so the premium can never be negative at issue. Where the subscription price equals par value, the whole proceeds are credited to share capital.
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