EIS scheme tax relief - does it also apply to dividend taxes?

janesmith

The Enterprise Investment Scheme (EIS) states that tax relief of 30% can be claimed on investments, up to £1,000,000 in one tax year, giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.

Does this income tax relief also apply to dividend taxes payable on dividend income from shares in companies please?

Thank you.

mostwelcome

It's income tax relief. However, it could take your marginal rate down a band, which would improve your dividend tax rate too no?

londoninvestor

mostwelcome wrote: »

It's income tax relief. However, it could take your marginal rate down a band, which would improve your dividend tax rate too no?

"Dividend tax" is income tax. Dividends are one of several types of income that are subject to income tax - among the others are employment income, pensions, interest etc.

So yes, any tax liability you have due to dividends can be offset against EIS subscriptions.

Also, note that EIS investments do not change your total taxable income, or the amount allocated to each band - so they can't change a taxpayer's marginal rate of tax.

janesmith

londoninvestor wrote: »

"Dividend tax" is income tax. Dividends are one of several types of income that are subject to income tax - among the others are employment income, pensions, interest etc.

So yes, any tax liability you have due to dividends can be offset against EIS subscriptions.

Also, note that EIS investments do not change your total taxable income, or the amount allocated to each band - so they can't change a taxpayer's marginal rate of tax.

Thank you! That's very useful.

I take it that dividend tax is income tax (or a form of income tax?), but dividend income is taxed on a completely different basis and with different thresholds and tax percentage rates than standard income tax?

londoninvestor

janesmith wrote: »

I take it that dividend tax is income tax (or a form of income tax?), but dividend income is taxed on a completely different basis and with different thresholds and tax percentage rates than standard income tax?

Yes and no The rates are different (including a 0% rate for the first £2k of dividends), but the tax on dividends does affect the tax on other income, and vice versa.

For example, somone earning £20k from employment and £3k from dividends will pay less dividend tax (7.5% of £1k) than someone who earns £80k from employment and £3k from dividends (they pay 32.5% of £1k on their dividends).

And someone whose income from employment is £500 under the threshold for the 40% band, but received £1k of dividends, may pay more tax (such as the Child Benefit Charge) due to the dividend income.

mostwelcome

Thanks londoninvestor for helpful clarifications.

So bottom line even if all your tax paid is on dividends rather than other forms of income, you are still able to get 30% of your EIS investment back as a relief of that tax paid.

Notionally then this means that you would be making an effective 42.85% gain on your investment, in the improbable but possible case that you hold the investment min 3 years and are able to sell it at the same price you invested

Just be careful though OP to choose your EIS investment wisely

janesmith

Yes, that you very much for clarifying matters londoninvestor. I appreciate you explaining it in a clear and helpful way.

mostwelcome - "Just be careful though OP to choose your EIS investment wisely" - very true. This is why, despite having been presented with so many of EIS investment opportunities over the last two years, I haven't invested in a single one yet. These are very high risk start-up ventures.

Does anybody know of sources of higher quality EIS-scheme eligible companies, which are more likely to be successful?