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. The current rate was set in 2021 at 8.75% for basic rate taxpayers, 33.75% for higher rate, and 39.35% for additional rate taxpayers). From April 2026, the basic and higher rates will increase by 2%, while the additional rate will remain unchanged.
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.
From April 2026, a £5,000 dividend paid outside a VCT would be taxed at 35.75% for a higher-rate taxpayer, increasing the income tax due and further widening the gap between taxable dividends and tax-free VCT income.
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.
See also: VCTs becoming more than just an end of tax year tool
Here’s a quick illustration under the current dividend tax rates:
- 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.
Adding value for clients
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 higher tax environment currently putting pressure onto UK taxpayers means that many 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.
See also: Five myths about VCTs
The Autumn 2025 Budget means 2026 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.
Diana French is chief commercial officer at Triple Point
