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What tax reliefs are there for UK startups?

Startups may be known for their tendency towards rapid growth – but like any traditional business, they need initial finance to get off the ground. Accounting for startups isn’t always as simple as taking on an existing business with lots of setup and structural aspects to consider. However, on the finance side, there are incentives on offer in the UK to help these budding enterprises grow. 

Why does the UK government offer startups tax relief?

The government recognises the value that profitable startups bring to the economy in the long run. However, investing in startups is notoriously risky. Many startups fail during their first year, which offers little assurance to investors that their money is safe. 

So, the government are keen to offer incentives in the form of tax relief to smooth the path to startup success for both entrepreneurs and investors.

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What tax reliefs are there for UK startups?

Tax relief schemes for startups include:

1. Enterprise Management Incentives (EMIs)

Cash-strapped startups can attract the talent they need with EMIs.

A qualifying startup (with assets under £30 million) may offer fixed-price share options to keep staff on board, and staff won’t have to pay Income Tax or National Insurance on the shares if they choose to buy them.

EMIs don’t apply to some industries, including banking and property development, but the startup heavy tech and catering sectors are covered.

2. Enterprise Investment Scheme (EIS)

Under the EIS, individual investors buying shares in a qualifying startup or social enterprise can claim up to 30% back in income tax relief on their investment. What’s more, if the shares increase in value, investors don’t pay Capital Gains Tax on the growth.

It’s worth noting that EIS shares can’t be sold on before 3 years has passed, the startup can’t raise more than £12 million using the EIS, and there are stipulations on what money raised from EIS shares can be spent on.

3. Seed Enterprise Investment Scheme (SEIS)

The SEIS is similar to the EIS, but it’s designed for less mature companies. Like the EIS, the SEIS helps a startup raise capital by offering tax relief to investors who buy shares at the earliest stages of trading – up to a total value of £150,000. This amount counts towards the £12 million total allowed under EIS.

To qualify for SEIS, startups must be less than 2 years old with less than £200,000 in assets and fewer than 25 FTE employees. If a startup has already received investment through EIS, it can’t issue shares under SEIS.

SEIS investors benefit from up to 50% income tax relief on their initial investment, Capital Gains Tax relief on profit from share sales and even loss relief should the startup fail.

4. Social Investment Tax Relief (SITR)

If your startup is a charity or ‘community interest company’, the UK government will allow investors to offset the risk by offering up to 30% tax relief on share purchases or new debt investment loans under SITR.

The startup must have less than £15 million in assets and fewer than 250 FTE employees to qualify, it mustn’t be a purely profit-making enterprise and the total you can raise under SITR is £1.5 million.

tax reliefs for UK startups

Do startups need accountants?

Startup founders are known for their visionary approach to business, but when it comes to the accounts it’s a good idea to keep your feet firmly on the ground.

Accounting for startups is all about deciding on the best structure for your business, registering for VAT, taxes and payroll as well as raising that crucial initial finance.

An accountant can walk you through the application process for each of the tax relief schemes detailed above, as well as lend their seasoned expertise to your business planning process to give your startup the best possible chance of success. If you’d like to learn more about what help is available, get in touch!