The income tax burden is growing, with the latest forecasts from the Office for Budget Responsibility suggesting it is set to increase to £310bn in 2027/28, representing 9.6% of GDP. Those bearing the heaviest part of this burden will be higher earners, with the latest statistics indicating that 25% of taxpayers with the highest incomes account for over 75% of all income tax receipts.

In response to this, higher earners looking for ways to potentially mitigate their income tax liabilities will find there are not many options available to them. Available options that might appear attractive are tax efficient investments qualifying for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).

EIS and SEIS offer generous tax reliefs, in particular advantageous income tax reliefs, in exchange for investing in early-stage companies. For example, EIS offers 30% income tax relief on investments up to £1m annually per investor, and more can potentially be invested into certain ‘knowledge-intensive’ companies. SEIS goes even further, providing 50% income tax relief on investments up to £100,000 annually per investor.

It is perhaps reflective of the economic environment more generally that the level of EIS and SEIS investments made collectively has fallen in recent years, following a peak in the 2021/22 tax year. While the tax reliefs offered are designed to offset some of the risk of failure in such companies, it has not been an easy time to start and raise funds for a business in general.

However, one of the tax reliefs offered by EIS and SEIS that can often be overlooked could contribute to a turnaround in these investment levels. Specifically, if a qualifying EIS or SEIS company fails, investors can claim relief against their income for losses suffered.

In order to understand how much of the risk is potentially covered by income tax relief, here’s an example: A high-earning investor puts £100,000 into an EIS-qualifying company. They receive £30,000 back via income tax relief. If the shares in the company become worthless, the remaining £70,000 can be claimed as a loss. Assuming a 45% income tax rate, that loss relief is worth £31,500. So, the investor recovers a total of £61,500 in income tax relief, meaning their effective financial exposure is just £38,500.

In total, 61.5% of the EIS investment could be effectively covered by income tax relief for most additional rate taxpayers. The amount protected could be even higher for SEIS investors (up to 72.5%). Scottish taxpayers could also obtain higher levels of relief due to higher income tax rates applicable to Scottish residents.

In response to a freedom of information request submitted by RSM UK, HMRC has confirmed that the levels of losses made on EIS and SEIS investments that have then been offset against income is increasing, as follows:

Individuals making these claims would have undoubtedly preferred not to have made a loss at all on their investments, and the growing levels of claims being made over the last few years highlights the risks involved with such ventures. However, the availability of this extra income tax relief can be extremely valuable in helping to offset the risk involved for higher earners in particular.

Related insights