diff --git a/doc/manual/rl-next/shebang-relative.md b/doc/manual/rl-next/shebang-relative.md
new file mode 100644
index 00000000000..dbda0db4c88
--- /dev/null
+++ b/doc/manual/rl-next/shebang-relative.md
@@ -0,0 +1,8 @@
+synopsis: ensure nix-shell shebang uses relative path
+prs: #5088
+description: {
+
+`nix-shell` shebangs use the script file's relative location to resolve relative paths to files passed as command line arguments, but expression arguments were still evaluated using the current working directory as a base path.
+The new behavior is that evalutations are performed relative to the script.
+
+}
diff --git a/src/nix-build/nix-build.cc b/src/nix-build/nix-build.cc
index 75ce12a8c3e..4120ca3cf82 100644
--- a/src/nix-build/nix-build.cc
+++ b/src/nix-build/nix-build.cc
@@ -298,7 +298,9 @@ static void main_nix_build(int argc, char * * argv)
     else
         for (auto i : left) {
             if (fromArgs)
-                exprs.push_back(state->parseExprFromString(std::move(i), state->rootPath(CanonPath::fromCwd())));
+                exprs.push_back(state->parseExprFromString(
+                    std::move(i),
+                    state->rootPath(CanonPath::fromCwd(inShebang ? dirOf(script) : "."))));
             else {
                 auto absolute = i;
                 try {
@@ -311,7 +313,7 @@ static void main_nix_build(int argc, char * * argv)
                     /* If we're in a #! script, interpret filenames
                        relative to the script. */
                     exprs.push_back(state->parseExprFromFile(resolveExprPath(state->checkSourcePath(lookupFileArg(*state,
-                                        inShebang && !packages ? absPath(i, absPath(dirOf(script))) : i)))));
+                                        inShebang ? absPath(i, absPath(dirOf(script))) : i)))));
             }
         }
 
diff --git a/tests/functional/nix-shell.sh b/tests/functional/nix-shell.sh
index 13403fadb82..702d3a6b566 100644
--- a/tests/functional/nix-shell.sh
+++ b/tests/functional/nix-shell.sh
@@ -59,6 +59,16 @@ chmod a+rx $TEST_ROOT/shell.shebang.sh
 output=$($TEST_ROOT/shell.shebang.sh abc def)
 [ "$output" = "foo bar abc def" ]
 
+# Test nix-shell shebang mode with an alternate working directory
+sed -e "s|@ENV_PROG@|$(type -P env)|" shell.shebang.expr > $TEST_ROOT/shell.shebang.expr
+chmod a+rx $TEST_ROOT/shell.shebang.expr
+# Should fail due to expressions using relative path
+! $TEST_ROOT/shell.shebang.expr bar
+cp shell.nix config.nix $TEST_ROOT
+# Should succeed
+output=$($TEST_ROOT/shell.shebang.expr bar)
+[ "$output" = '-e load(ARGV.shift) -- '"$TEST_ROOT"'/shell.shebang.expr bar' ]
+
 # Test nix-shell shebang mode again with metacharacters in the filename.
 # First word of filename is chosen to not match any file in the test root.
 sed -e "s|@ENV_PROG@|$(type -P env)|" shell.shebang.sh > $TEST_ROOT/spaced\ \\\'\"shell.shebang.sh