It is possible to reduce the amount of income tax you pay. There are many well document ways such as making use of ISAs. On these pages we have concentrated on less well know ways, but which are in our view potentially more effective.

Use of investments

One common way of reducing the amount of income tax you pay is to make pension contributions. The trouble with this is that if retirement is a long way off (age 55 currently), this can be a huge disadvantages and in some ways this is tax deferred rather than avoid. (See below for some examples).

One way of reducing your income tax is to use a venture capital trust, or VCT for short.

With a VCT you get 30% tax relief. What that means is that every £100 you put in, you get £30 taken off of your income tax bill. And you only have to keep the investment for five years. Unlike a pension, all of the money you take out is tax-free.

Worked example

Mr Jones earns £68,750 per year and has no other income. This gives him an income tax bill of £15,000.

Mr Jones invests £50,000 into a VCT. This means that he has £15,000 taken from his tax bill. Therefore, provided he keeps the VCT for five years he will have avoided a £15,000 tax bill.

What’s more, after five years he can sell the VCT and repeat the process. During the course of five years it would be hoped that the investment would provide dividends (profit), and grow or maintain its value.