Why tax-free dividends make the investment case for VCTs even stronger

When it was announced in the Autumn 2025 Budget that the upfront income tax relief that could be claimed by investing in a venture capital trust (VCT) was to be reduced from 30% to 20%, the news drew lots of criticism from the industry. At the time, Richard Stone, CEO of the Association of Investment Companies (AIC), said the decision “undermines the incentive to invest in VCTs”.

However, the income tax relief available through a VCT was only ever one part of the picture for VCTs. In fact, their ability to deliver regular, tax-free income through dividend payments deserves more attention among advisers and their clients. The reduction of upfront income tax relief, as well as increases on other tax thresholds, means it’s time to give VCT dividends their long overdue credit.

Traditional dividends are taxed heavily

As a reminder, traditional dividend-paying investments are taxed on the owner’s income tax band, with a special rate applicable to dividend income. This rate increased in April 2026 to 10.75% for basic rate taxpayers, 35.75% for higher rate, and 39.35% for additional rate taxpayers.

There is, of course, an annual dividend allowance which everyone can claim, but it has shrunk dramatically in recent years. What was a reasonable allowance of £5,000 ten years ago has been repeatedly reduced to an almost inconsequential £500 since April 2024.

VCTs remain a great source of tax-free income

By contrast, any dividends paid by a VCT are paid gross and are still completely tax-free, delivering an unencumbered income stream to investors. This means higher and additional rate taxpayers stand to make significant tax savings by choosing a VCT over other dividend-paying investments.

Here’s a quick illustration. Suppose a higher-rate taxpayer has a £100,000 investment portfolio and receives £5,000 a year in dividends from income-paying FTSE-listed shares. Assuming their £500 dividend allowance remains available and all the taxable dividends fall within the higher-rate band, £4,500 would be taxed at 35.75%. This would produce a tax charge of £1,608.75, leaving net income of £3,391.25. By contrast, £5,000 of dividends from qualifying VCT shares would be free of Income Tax, representing a tax saving of £1,608.75.

Another way to view this is to ask how much a £100,000 taxable portfolio would need to generate to provide £5,000 of post-tax dividend income. Assuming the £500 dividend allowance is available, the required gross yield would be approximately 7.50% for a higher-rate taxpayer and 7.92% for an additional-rate taxpayer. If the investor had already used their dividend allowance elsewhere, the corresponding yields would rise to approximately 7.78% and 8.25%.

Of course, dividend targets are not guaranteed, and VCTs carry materially different investment and liquidity risks from established listed companies. But for clients who understand and accept the risks involved, it’s easy to see how investing in a dividend-paying VCT could deliver a serious amount of tax-free income over time.

The Triple Point Venture VCT

Triple Point Venture VCT’s record helps demonstrate how such an income stream may build over time. It has an annual dividend target of up to 5% of its net asset value (NAV) and, since launching in 2018, it has paid out cumulative tax-free dividends of 21p per share. Past dividends do not, however, guarantee future payments.

More recently, the Board of the VCT declared a dividend of 2p per share, payable on 16 December 2026 to all shareholders on the register at the close of business on 27 November 2026. For clients looking to invest ahead of this dividend, applications must be submitted with cheques by 19 November or with cleared funds by 20 November. The subsequent allotment will take place on 24 November.

Adding value for clients

At Triple Point, advisers have been telling us that clients are still using VCTs as part of their annual planning, particularly higher-rate taxpayers, retirees, and high-net-worth individuals who value tax-efficient income. For example:

• For higher rate taxpayers, VCT tax relief can still be applied to all forms of income tax paid, including tax on dividends and rental income.
• For business owners, a VCT helps those who have already maximised their annual pension and ISA contributions, as well as providing valuable diversification.
• For retirees, VCT dividends can deliver that all-important stream of tax-free income to supplement pensions or other savings, without affecting personal tax allowances or hiking annual tax bills.

Instead of worrying that lower income tax relief will undermine VCT investment, perhaps it’s time to talk to clients about what they can gain from owning a VCT. After all, a targeted income stream that arrives free of tax, on top of tax-free growth, is one of the few ways left for investors to build a meaningful, tax-efficient income stream outside of their pension, and therefore deserves to be front and centre of every financial planning conversation.

Important information

This article is an advertisement for the purposes of the FCA’s Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM) and is not a prospectus. A prospectus in respect of the Offer has been published and is available on our website. Investors should read the prospectus before making any investment decision. Approval of the prospectus by the FCA should not be understood as an endorsement of the shares offered.

Potential investors must only subscribe for, or purchase shares based on information contained within it. The Triple Point Venture VCT invests in smaller companies, which can involve a higher degree of risk than investing in companies listed on an exchange. Investors’ capital is at risk and there is no guarantee that target returns will be achieved. 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. Dividends are not guaranteed. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority.