Investing in Start-Ups: Tax Breaks

You can invest in start-ups via online platforms, such as Seedrs, and get a major tax break. Small to medium-sized businesses are those with less than 250 employees and the UK government have set-up majorly attractive tax relief schemes to invest in these. 

Why are these businesses so special?

Well, with over 5.4 million of them in the UK that equates to a whopping 99% of all businesses so they’re massive for our economy. But it can be tough going for smaller businesses, finding investment is hard because they are ‘new’ or ‘small’. Investors are far more likely to invest in big companies where their money is more secure. To tackle this dilemma, the government launched two tax relief schemes to help (er, encourage) people to invest in smaller businesses: The Seed Enterprise Investment Scheme (or SEIS) and the Enterprise Investment Scheme (EIS). 

Ummm…what’s a tax relief?

You pay income tax on your salary – 20% if you’re a basic-rate tax payer, 40% if you’re a higher-rate payer and 45% if you’re an additional-rate payer. By investing in an SEIS or EIS registered company you can claw back some of your tax.

Sounds great! Exactly how much?

If you invest through the SEIS you'll get 50% tax relief and 30% through the EIS - for each £1,000 you invest that is £500 or £300, respectively. Yes, it’s a lot! But remember it’s to encourage you to invest in a riskier company. The government is simply reducing your risk. 

Gimme an example

Say you pay £20,000 in income tax and in the same year invest £10,000 in an SEIS registered company, you could reduce your tax bill by £5,000 (50% SEIS relief). That means you'll claw back £5,000 of your £20,000 tax bill.

Side note: Your tax bill for the year has to be at least £5,000 - you can’t go into negative numbers. And you have to be a UK tax payer too.

Is there a catch?

A minor one. You have to keep your money invested for at least three years. If you sell your shares before then your tax relief may be reduced or you may not be able to claim any at all.

Big spenders (er, investors) read this: Tax relief on the SEIS is limited to £100,000 invested each year (that’s £50,000 relief) and £1,000,000 invested in total on the EIS (that’s £300,000 relief).

Which companies are SEIS and EIS registered?

The schemes are designed to help smaller, early-stage companies. Here’s an overview of the companies accepted...

How do I invest in them?

If you invest through a crowdfunding website or business angel network, they'll label SEIS and EIS registered companies and will help you with the paperwork. You can also invest directly in a private company that you’re familiar with as long as you're not already connected to it. This means you can’t be an employee, director or owner of at least 30%.

Anything else?

If you forgot to claim the relief in the same year you invested you haven’t missed the boat. A claim can be made up to five years after the 31st January following the tax year in which you made the investment.