EIS for additional-rate (45%) taxpayers

The UK's top rate of income tax is 45%, not 50%. The 50% rate existed only for the three tax years from 2010/11 and was reduced to 45% from 2013/14. The additional rate now applies to non-dividend income above £125,140, a threshold that was cut from £150,000 in April 2023 and has been frozen since.

You will still see 50% quoted in older material. If you are working out what a scheme is worth to you, use 45%.

Take a consultant surgeon with taxable income of £180,000, investing £50,000 under EIS. Income tax relief at 30% is £15,000, so the net cost of the investment is £35,000.

If the company is later sold for £150,000, the £100,000 gain is free of capital gains tax provided the shares were held for at least three years and the company kept its qualifying status. Measured against the £35,000 net cost, that is a materially different outcome from the same gain on an unrelieved investment.

If instead the company fails and the shares become worthless, loss relief applies to the £35,000 net cost. Claimed against income at 45%, that recovers £15,750, leaving a net loss of £19,250 on a £50,000 investment. The tax system absorbs a large share of the downside but not all of it.

You need sufficient income tax liability in the year to absorb the relief; the relief is not paid out in cash. You can carry back an EIS subscription to the previous tax year, which sometimes helps.

The three-year clock runs from the issue of the shares, or from the start of trade if that is later. Selling early withdraws the relief.

And the relief only arrives once the company issues the EIS3 certificate, which usually follows some months after the raise closes, since the company must have been trading for four months before it can apply.