EIS - retrospectively reduce your tax bill

Tax-incentivised investments

There are several types of investment which come with tax incentives. These fall into two categories: those where the income derived from your investment is tax free and those where there’s tax relief for the capital you invest. In addition, there are investments that offer both, e.g. the enterprise investment scheme (EIS).

Warning. The EIS involves investment into relatively small companies and therefore your capital is at risk if the business fails. However, the tax incentives are generous which can make a difference. Nevertheless, we recommend talking to a financial advisor before investing.

EIS income tax relief

As mentioned, EIS investments give you tax incentives on capital and the income derived from your investment (click here ). In this article, we’re only looking at the former and how you can use the income tax relief to its best advantage.

Choice of year

A key point of EIS relief is that it’s given as a credit against your tax liability rather than a reduction in your taxable income. This is important because if your tax liability is less than the EIS relief you won’t get the maximum tax advantage from it. For example, if the EIS relief is £10,000 and your tax liability for the year is £9,000, then £1,000 of the relief is wasted.

Tip. Unlike most tax reliefs, when you invest in an EIS investment you get a choice of two years for which you can claim the corresponding tax relief; the tax year in which you make the investment or the previous year. So if your income tax liability isn’t enough in the year of investment you can opt to take the relief in the previous year or divide the relief between both years.

How much relief?

At whatever rate of tax you pay you’re entitled to the same amount of tax relief, which is 30% of the amount of qualifying investment. The year for which you claim the tax relief affects when you benefit from it and tax relief can affect your tax bill retrospectively. The following example illustrates how you can expect to receive tax relief for an EIS investment made on or before 5 April and how to claim it to obtain the greatest advantage.

Example. Becky’s tax liability for 2022/23 was £30,000 based on her self-assessment tax return. Of this, £8,000 was due and paid on 31 January. She had to pay £15,000 (£30,000 / 2) on account of her 2023/24 tax liability, making her 31 January tax bill £23,000. On 29 February 2024 she invested £30,000 in an EIS portfolio. She cannot claim the £9,000 (£30,000 x 30%) tax relief for this until she receives the EIS 3 certificate from the company, which can take several months (click here ). The EIS 3 arrives in May. Becky sends a claim to HMRC for EIS relief to be carried back to 2022/23. This reduces her liability to £21,000 and her payment on account for 2023/24 to £10,500 (£30,000 - £9,000)/2). HMRC processes Becky’s claim three weeks later and she receives a refund of £13,500 in early June. What’s more, her second payment on account of her 2023/24 liability due on 31 July is reduced from £15,000 to £10,500.