There are over 150,000 Google searches per month related to income tax alone. So it’s no surprise that “how to reduce your income tax” is near the top of the follow-on questions. Most finance gurus responding to the topic cover the basics such as ensuring your tax code is correct (it probably is) and the importance of putting money into your pension.

These are great, but the gurus play it safe and often overlook the alternative investments available for more experienced investors who may have already hit their annual limits, or are looking for more significant tax reliefs. Chief among these is the Enterprise Investment Scheme, commonly known as EIS.

reduce income tax

What is EIS?

The Enterprise Investment Scheme is just one of the venture capital schemes created by the government to incentivise individuals to invest in early stage companies that are not listed on a recognised stock exchange.

Individuals can access the tax reliefs on offer by investing directly into qualifying companies or indirectly through an EIS fund. Funds create portfolios of EIS-qualifying companies for their underlying investors.

How does EIS reduce your income tax bill?

Foremost among the tax reliefs EIS offers is income tax relief. Investors may reduce their income tax bill by up to 30% of the amount they invest into qualifying companies. This amount is slightly reduced when investing through a fund once fees are deducted.

For example, if an investor were to invest £10,000 into an EIS qualifying company, they would be able to reduce their income tax bill by £3,000. Yes, you read that right, they can reduce the amount of tax they owe to the government by £3,000 and would have an investment of £10,000 in a potentially fast-growing company, along with additional tax benefits and deferral options.

What are the other tax reliefs EIS offers?

Beyond the income tax relief, investors can take advantage of several other tax benefits from the scheme.

  1. Investors can defer capital gains into EIS and put off paying them until a later date.
  2. Investors can benefit from the Inheritance Tax relief offered by the scheme.
  3. Investors pay no capital gains on profits realised through the scheme (on shares held for a minimum of two years).
  4. Investors can claim further loss relief on investment through the scheme that result in a loss.
reduce income tax

Are there any downsides to EIS investments?

Investing into the early stage companies that qualify for the scheme is high risk. Never invest more than you can afford to lose, as a high proportion of startups fail. Be sure to keep in mind that these are long-term, illiquid investments. There is no secondary market to trade shares in privately-held companies, and the companies that do succeed can take years to grow and achieve an exit, meaning you might not see returns for some time.

How does the Access EIS fund tackle the downsides?

We know the market data inside out.

Our model is based on three years of analysis of the UK startup market. We tracked every company and transaction and identified a pattern of consistent annual growth across the market as a whole, and the individual investors who were able to regularly outperform it.

Our angel network connects us with the very best startups.

We only invest in a startup when one of the UK’s top angel investors backs it. Our network of angels ensures that the companies we back aren’t chosen by a fund manager, but by a group of experienced investors whose success at backing startups can be measured.

We build large, diverse portfolios for optimal growth potential.

The larger a portfolio, the closer it comes to replicating the growth of the market as a whole. Our investors receive fifty new portfolio companies over the course of each twelve month deployment cycle, and a further fifty are added with each subsequent investment. When it comes to portfolios, bigger is definitely better, and ours are the most diverse on the market.

Follow the links below to register for our newsletter or to make an investment. You can also call us on 01223 478 558 if you have any questions, we'll be more than happy to answer them.

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