EIS income tax relief: how the 30% works in practice

EIS income tax relief reduces your income tax bill by 30% of what you subscribe for qualifying shares, on up to £1 million of investment a tax year. It is a reduction in tax owed, not a cash payment, so it is capped by your income tax liability for the year you claim against.

Income tax relief is the headline EIS benefit and the one most investors claim. The conditions, the caps and the circumstances in which HMRC takes the relief back are set out in HS341, and summarised below. The wider scheme is covered in the EIS guides hub.

The calculation

The example assumes an income tax liability of at least £15,000 in the year the relief is claimed. Relief can reduce your liability to nil but no further; it is not repayable.

What happens when your tax bill is smaller than the relief

The unused £6,000 is not refunded and cannot be carried forward to a later year. The way to use it is to carry all or part of the subscription back to the previous tax year, where there may be a liability to set it against.

The limits

• £1 million of EIS investment a tax year qualifies for relief.
• This rises to £2 million where anything above £1 million is invested in knowledge-intensive companies.
• Relief is capped by your income tax liability for the year in question.
• You must not be connected with the company, broadly through employment or a holding above 30%.

Carry back

You can elect to treat all or part of an EIS subscription as though it were made in the previous tax year, and claim the relief against that year's income tax. This is useful when the current year's liability is too small to absorb the relief, or when the previous year's was unusually large. The previous year's annual limit still applies, and it is reduced by any EIS investment already relieved in that year.

Carry back is an election made as part of the claim, not a separate process, and it only reaches back one tax year. EIS carry back works through the timing in detail.

When relief is withdrawn

• You dispose of the shares within three years of the issue date.
• The company ceases to meet the qualifying conditions within that period.
• You receive value from the company, for example a loan or a non-commercial benefit.
• You become connected with the company during the qualifying period.

Withdrawal is not automatic paperwork on HMRC's side: you are required to tell HMRC within 60 days of the event that caused it. The relief is then clawed back by an assessment for the year in which it was originally given, with interest. Where shares are sold at a loss to an unconnected person within three years, relief is withdrawn only in proportion to the sale proceeds rather than in full.

Common questions

Is EIS relief a refund or a reduction?

A reduction. It lowers the income tax you owe for the year you claim against. If you owe no income tax, there is nothing for the relief to reduce and no payment is made.

Can EIS relief be carried forward to a future year?

No. Relief can be carried back one tax year but never forward. Unused relief is simply lost, which is why the size and timing of your liability matters before you subscribe.

Does EIS relief apply to dividend or savings income?

It reduces your overall income tax liability for the year, so it is set against the tax due on your income as a whole rather than on one category of income.

What if the company fails after I have claimed?

A genuine failure does not claw back the income tax relief, and you can claim EIS loss relief on the net amount at risk against income or gains.