Twice as many to pay additional rate income tax – could VCT tax relief help?

Over 860,000 people are expected to pay additional-rate income tax this year – twice as many as in 2020/21. 

That’s because the additional-rate threshold has been cut from £150,000 to £125,140, putting a whole new group in the highest tax bracket. To make matters worse, £125,140 is also the threshold at which taxpayers will have lost their entire Personal Allowance, as £1 of the allowance is withdrawn for every £2 of income above £100,000. 

This could be all the more reason for high earners to consider tax-efficient ways of putting money aside. 

ISAs and pensions are often the first port-of-call – but once these allowances are used up, what other options are there for experienced investors?

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.

Some VCTs are now open – you can see current offers and apply online. Plenty more are due to open soon. The VCT season is expected to start early this year, with several offers opening in September – you can see all upcoming offers and register your interest to be the first to know when they open.

VCTs: generous tax relief to support young British business

VCTs invest in a portfolio of small, entrepreneurial businesses, aiming to help them grow and to generate a return for investors. To encourage this, and to temper some of the risks involved in backing smaller companies, the government provides several tax benefits to VCT investors.

When you invest in VCTs, you could receive up to 30% income tax relief – a potential saving of up to £60,000 on your income tax bill when using the generous £200k annual allowance in full. 

Any returns – which are not guaranteed – are usually paid out as dividends. Note, tax rules can change and benefits depend on circumstances. 

The fact VCT dividends are tax free could be of significant value, especially now the tax-free allowance for dividends has been halved to just £1,000 (and will be halved again the next tax year).

If a VCT pays a 5% dividend, that 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). Note: dividends are variable and not guaranteed.

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.

VCTs’ growing appeal

In addition to delivering valuable tax savings, since VCTs were first created in 1995, a number have developed established track records. 

In the 10 years to June 2023, the 10 largest generalist VCT managers have delivered an average NAV total return of 86% (assuming dividends are reinvested) – outperforming the main stock market. Meanwhile, AIM VCTs have on average performed 2.4x better than AIM, up 57.9%. 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. Please remember, past performance is not a guide to the future. 

VCTs have achieved this by backing the next generation of UK entrepreneurs – from fraud-prevention big-data analytics firm Quantexa (Albion VCTs) and Emmy Award-winning special effects creators Outpost VFX (British Smaller Companies VCTs), to “ethical hacker”-powered cybersecurity platform Intigriti (Octopus Apollo VCT) and preloved luxury handbag authenticator and marketplace Luxury Promise (ProVen VCTs), specialising in a category of goods that can bring up to six-figure sums at auction houses Sotheby’s and Christie’s.

What to consider next?

There are currently a few VCT offers open for investment – several more are expected to open from September. You can apply online for current offers or register your interest for upcoming ones. 

Please bear in mind, though: VCTs are high risk, you should not invest money you cannot afford to lose. Each VCT offer has finite capacity: it targets a specific amount to raise and once that’s reached, it closes and popular VCTs tend to fill quickly.

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.