Why tax-free dividends are the ‘secret weapon’ of VCTs

While much of the discussion around venture capital trusts (VCTs) focuses on upfront income tax relief or long-term capital growth, their ability to deliver regular, tax-free income through dividend payments is underappreciated and deserves more attention among advisers and their clients.

Traditional dividends are taxed heavily

As a reminder, traditional dividend-paying investments are taxed based on the owner’s income tax band (with a special rate applicable to dividend income. This rate was set in 2021 at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate taxpayers).

There is, of course, an annual dividend allowance which everyone can claim. However, this allowance has shrunk dramatically in recent years. It was set at £5,000 as recently as April 2016, but since then has seen swingeing cuts taking it down to £2,000 from April 2018, halved to £1,000 from April 2023, and then halved again to just £500 from April 2024.

VCTs are a great source of tax-free dividend income

By contrast, any dividends paid by a VCT are paid gross and are completely tax-free, delivering an unencumbered income stream to investors. This is particularly helpful for higher and additional rate taxpayers who stand to make significant tax savings when compared with other dividend-paying investments.

Here’s a quick illustration. A higher-rate taxpayer who earns £5,000 in dividends from shares in a FTSE-listed company would be required to pay income tax at a rate of 33.75%. After subtracting the dividend allowance, they would be left with just £3,481.25 in cash. If they instead received a £5,000 VCT dividend (or dividends), this would result in a tax saving of £1,518.75. It’s easy to see how investing in dividend-paying VCTs could help deliver a serious amount of tax-free income over time.

Which clients could benefit most from tax-free VCT dividends?

While ISAs also offer tax-free dividends, the annual contribution limit for ISAs (£20,000 in the 2023/24 tax year) can constrain investors looking to deploy larger sums. VCTs, by contrast, allow investments of up to £200,000 per year with tax-free dividend benefits, providing greater flexibility for wealthier clients. Additionally, for those clients have used up their pension contribution allowance for the current tax year, also having the ability to claim up to 30% income tax relief on VCT investments creates an upfront incentive unmatched by ISAs or other investment vehicles.

Adding value for clients

At Triple Point, advisers have been telling us that more of their clients are using VCTs as part of their annual planning, becoming an additional and integral part of strategies that used to mainly feature pensions and ISAs. For example, VCTs are proving particularly attractive to higher-rate taxpayers, retirees, and high-net-worth individuals who value tax-efficient income. For example:

• For higher rate taxpayers, owning a VCT can help reduce rising income tax bills, and the relief claimed can be applied to all forms of income tax paid, including tax on dividends and rental income.
• For business owners, a VCT can help where they have already maximised their annual pension and ISA contributions, as well as offering them valuable diversification.
• For retirees, VCTs can deliver that all-important stream of tax-free income, helping to supplement pensions or other savings without affecting personal tax allowances or hiking annual tax bills.

The Triple Point Venture VCT

The higher tax environment currently putting pressure onto UK taxpayers means that many of your clients might be interested in finding tax-efficient investments that offer consistent tax-free income streams. Although VCT dividends are not guaranteed, there are many VCTs on the market with strong track records of regular dividend payments.

For example, the Triple Point Venture VCT has an annual dividend target of up to 5p per share, and since launching in 2018, it has paid out 15p per share in tax-free dividends, including a 2p dividend paid in December 2024. In January 2025, the board of directors announced it will also pay an interim dividend of 2p per share to shareholders in March 2025, bringing the total amount paid out in tax-free dividends by the VCT to 17p per share since launch.

The Autumn 2024 Budget means that 2025 will be a critical year for financial advisers as they navigate an increasingly complex tax environment for their clients, many of whom will be facing a higher tax burden and be worried about trying to ‘do more with less’. Tax-free dividends available through a VCT could therefore be a highly important subject to raise with clients, particularly for high earners, business owners, and retirees seeking alternative income sources.

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 website. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority.