Autumn Statement – will we see any income tax cuts?
Chancellor Jeremy Hunt is due to deliver the Autumn Statement on Wednesday, 22 November.
The current burden on UK taxpayers is at a record high, but the Chancellor has already mentioned in a radio interview that tax cuts would be “virtually impossible” for the time being – citing the challenging state of the public finances and the interest bill on the highest national debt since the 1960s.
So the tax squeezes on income that were introduced in April this year – with an extra 1.6 million taxpayers pushed into higher and additional rates of income tax by frozen thresholds – appear unlikely to be eased drastically, if at all.
Where could experienced investors turn to invest tax-efficiently, if affected?
This article looks at Venture Capital Trusts (VCTs), which offer up to 30% income tax relief as well as tax-free dividends. Tax rules can change and benefits depend on circumstances. Dividends are variable and not guaranteed.
There are currently several VCT offers open for investment – you can see current offers and apply online. More are due to open soon – you can see all upcoming offers and register your interest to be the first to know when they open.
VCTs – up to 30% income tax relief and tax-free dividends
VCTs were introduced in 1995 to encourage private investors to back small, entrepreneurial UK businesses – the government sees such businesses as a powerhouse of the economy, creating jobs and growth. To encourage investment in such companies and to temper some of the risks, the government also provides several tax benefits.
When you invest in VCTs, you could receive up to 30% income tax relief – a potential saving of as much as £60,000 on your income tax bill when using the generous £200k annual allowance in full.
Any returns are usually paid out as tax-free dividends. This could be particularly attractive now that the tax-free allowance for dividends has been halved to just £1,000 (and will be halved again the next tax year). Remember, though, that dividends are variable and not guaranteed.
To illustrate: if a VCT pays a 5% dividend, this means 5p in your hand for every £1. To match that, assuming the dividend allowance has already been used, a higher-rate taxpayer would have to get a taxable dividend of 7.55% (8.24% for a top-rate taxpayer).
Indeed, in a survey we carried out last year – completed by over 1,300 VCT investors – 71.7% cited tax as a reason that prompted them to start investing in VCTs.
How does VCT performance compare?
In addition to offering valuable tax savings, many VCTs have established track records of returns for investors.
In the 10 years to September 2023, the 10 largest generalist VCT managers have on average generated a NAV total return of 81.4% (including dividends reinvested) – outperforming the main stock market. Please remember, past performance is not a guide to the future.
In the short term, VCTs – much the same as the wider stock market – have endured a challenging environment, and performance has suffered as a result. That said, VCT-backed companies continue to grow at a faster rate than their listed counterparts.
VCTs can only invest in companies meeting certain criteria, including having under £15 m in gross assets and fewer than 250 employees at the point of investment. Young, ambitious companies can be more dynamic, as well as higher risk, than their larger counterparts.
Our recent VCT research (covering 21 VCT managers, accounting for c.92% of the assets of all active VCTs) found nearly half (48.4%) of portfolio companies have grown revenues by more than 25% year on year. By contrast, only a quarter (25.4%) of the FTSE All Share constituents, excluding investment trusts and insurance companies, have achieved that.
VCTs fare even better in the category of rapid-growth companies (those growing revenues at over 50% a year): over a quarter (26.4%) of VCT portfolios overall are invested in such companies, compared with just 6.7% (by market cap) of the main market.
You can see more details on individual VCTs’ performance in each review and look at the performance of the 10 largest VCT managers over a period of three, five and 10 years. As is to be expected when investing in young companies, there will also be failures.
What to consider next?
There are several VCT offers currently open for investment, and more are expected to open soon. You can apply online for current offers or register your interest for upcoming ones. Each VCT offer has finite capacity: it targets a specific amount to raise and once that’s reached, it closes. The most popular VCTs tend to fill quickly.
Please bear in mind, though: VCTs are high risk and should only be considered by experienced investors as a part of a diversified portfolio. You should not invest money you cannot afford to lose.
When you invest through Wealth Club, you can apply online and benefit from market-leading discounts and in some cases an annual rebate of up to 0.15% for three years (terms apply).
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.