Why VCTs can be a sound investment for high earners

Now that the dividend allowance has been reduced to just £500 for the current tax year, the opportunity to receive tax-free dividends could be warmly received by higher or additional rate taxpayers. Here’s where a venture capital trust (VCT) with an annual dividend target can help high earners.

When was the dividend allowance reduced?

As a reminder, the dividend allowance is the total amount shareholders can receive in dividends before they must start paying tax on them. It was reduced from £2,000 to £1,000 for the 2023/24 tax year, and then halved again to £500 on 6 April 2024 for the 2024/25 tax year.

Basic rate taxpayers who receive dividends above the dividend allowance threshold must pay tax at 8.75% on the excess. Higher rate taxpayers pay tax at 33.75%, while additional rate taxpayers must pay a rate of 39.35%. The dividend allowance doesn’t apply to individual savings accounts (ISAs), which are still tax-free.

What can higher rate taxpayers do?

So what other investment options are available to higher rate taxpaying clients, who want to pay less income tax and don’t want their investments to exceed the dividend allowance? Well, after using up their annual ISA allowance, they could pay more into their pension, which is still the most tax-efficient way to invest for the future. But paying more into a pension has its drawbacks, especially for clients who would prefer not to lose access to their money until they reach retirement age.

Alternatively, they could look at buying VCT shares instead. Take for example, Reuben, who is a 42-year-old Finance Director with an annual salary of £150,000. Reuben recently received an annual bonus of £50,000. He initially considered putting that money into his pension, but while he knows this is probably the most tax-efficient option available to him, he is mindful that any large sums placed into his pension won’t be accessible until he turns 55. He would prefer not to tie up his money for that long.

Investing in a VCT for tax-free dividends

Reuben discusses his situation with his financial adviser, who talks through the benefits and the risks of investing in a VCT. Reuben’s adviser tells him that if he invested the £50,000 into the Triple Point Venture VCT, he would be able to claim up to 30% income tax relief on the investment, equalling £15,000, provided Reuben holds his VCT shares for the minimum five-year holding period.

Also, as the Triple Point Venture VCT has an annual dividend target of up to 5p per share, Reuben can expect to receive an annual tax-free income from his investment. VCT dividends are completely tax-free and there’s no HMRC requirement to declare them on tax returns. Reuben’s adviser reminds him that dividend payments are not guaranteed, that tax rules and reliefs are subject to change and the availability of tax reliefs for investors depend on their personal circumstances.

Why else should higher earners consider VCTs?

Aside from the tax benefits, investing in a VCT could be beneficial for high earners who want to freshen up their portfolio. For example, it’s a great way to diversify an existing investment portfolio of equity and bond investments. Provided they are comfortable with the risk that comes with investing in early-stage unlisted companies, a VCT gives clients access to an asset class that individual investors would otherwise not be able to access.

The Triple Point Venture VCT: new share offer

With more clients likely to have concerns about higher taxes, now could be a good time to start discussing tax-efficient investments that give them the opportunity to lower their tax bill. Now in its seventh fundraising year, the Triple Point Venture VCT is open for investment, giving  investors access to a portfolio of 50 ambitious early-stage companies at different stages of maturity, alongside the opportunity to claim valuable tax reliefs, including up to 30% income tax relief.

Find out more about the Triple Point Venture VCT

Important information

This article is an advertisement for the purposes of the Prospectus Regulation Rules and is not the prospectus. The Triple Point Venture VCT carries all the risks of investment in smaller companies and places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each client and is subject to change. Tax reliefs depend on the VCT maintaining its qualifying status. Investors should only subscribe for shares on the basis of information contained in the Prospectus which is available via the Documents section of the website. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority.

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