Reducing income tax

VCTs can be used by many people to reduce their income tax liability. They are not just for the “super wealthy”. 

You can invest up to £200,000 per year and get your income taxed reduced by up to £60,000. Although they can only be used to reduce your tax liability to zero. This applies to all income that is subject to income tax, including salary, dividends and tax on savings interest. 

If you had an income tax liability of £20,000, then there would be no tax advantage of paying in more than £66,666, as 30% of this is £20,000. If you paid in £100,000 it would still only reduce your income tax bill to zero as your tax bill is “only” £20,000.   

Worked example of a VCT

Here’s a example of how a VCT could be used to reduce the income tax liability for an employed person. 

Mr Armstrong is employed and earns £110,000 per year. He only pays £10,000 per year into a pension, as he is close to the Lifetime Allowance and does not want to exceed it. He does not pay tax on savings, as his savings are all in ISAs. So he has a £100,000 of is income that is taxable. 

He’s below state pension age. His income tax liability on the £100,000 works out at £27,428.

In March he pays £91,426 into a VCT. He gets tax relief of 30% (a 30p reduction in tax for every £1 paid in). 30% of £91,426 amounts to £27,428.

In this example, he has completely avoided paying income tax for the year by making this one contribution.

But even if he didn’t want to “wipe out” all of his tax, he could have put a smaller amount into a VCT – a £30,000 investment would have taken off £10,000 of his tax liability. 

Contact us today to find out more about how a VCT can work for you.

Other scenarios using a VCT

If you want advice on how to reduce your tax, or have a question, or just want to have a chat about reducing you tax liability with a UK Qualified Independent Financial Adviser, then phone now on 01793 686393 or contact us online.