EIS Investment: Retroactively Reduce Your Tax Bill and Get a Refund

Thinking about tax-efficient investments? The Enterprise Investment Scheme (EIS) offers attractive benefits, including the ability to claim back tax you already paid on January 31st. But how does it work in practice?

Tax-Incentivized Investments Explained

Several types of investments offer tax benefits, categorized into two groups:

• Tax-free income: Investments where income generated is exempt from taxation.
• Capital investment tax relief: Investments where you receive tax relief on the capital you invest.
• Both income and capital relief: Some schemes, like the EIS, offer both types of benefits.

Important Note: EIS investments involve relatively small companies, meaning your capital is at risk if the business fails. While the tax incentives are generous, consult a financial advisor before investing.

EIS Income Tax Relief: Flexibility and Benefits

EIS investments offer tax relief on both invested capital and generated income (details in the next section). This article focuses on capital relief and its potential benefits.

Key Point: Credit vs. Reduction

EIS relief is a credit against your tax liability, not a reduction in your taxable income. This means if your tax liability is lower than the relief amount, you won't benefit fully. For example, a £10,000 relief with a £9,000 tax liability leaves £1,000 unused.

Tip: Choose Your Claim Year

EIS offers flexibility in claiming tax relief. You can choose either the investment year or the previous year. This allows you to maximize benefits even if your current tax liability is insufficient. You can even split the relief between both years.

How Much Relief Do You Get?

The relief amount is 30% of your qualifying investment, regardless of your tax rate. Claiming in different years affects the timing of your benefit. Let's see how it works with an example:

Example:

Sandra's 2022/23 tax liability was £30,000, with £8,000 already paid on January 31st. She needs to pay £15,000 on account for 2023/24, making her total January 31st bill £23,000. On February 29th, 2024, she invests £30,000 in an EIS portfolio.

• She can't claim the £9,000 (£30,000 x 30%) relief until receiving the EIS 3 certificate from the company (usually after several months).
• Assuming she receives the certificate in May, she sends a claim to HMRC to carry back the relief to 2022/23.
• This reduces her liability to £21,000 and her 2023/24 payment on account to £10,500 (£30,000 - £9,000)/2).
• HMRC processes the claim, and she receives a refund of £13,500 in June.
• Plus, her second 2023/24 payment on account (due July 31st) is reduced to £10,500.

Key Takeaway:

EIS investments made before April 5th, 2024, can reduce your 2022/23 tax bill, allowing you to claim back paid self-assessment tax and part of your 2023/24 payment on account. For example, a £30,000 EIS investment could result in a £13,500 tax refund.

‍