According to the Office for Budget Responsibility, tax revenues in the UK are set to reach 36.5 per cent of national income this financial year.
That’s the highest level of tax taken since 1949 and is up considerably from 33.1 per cent in 2019. But things could be about to get worse, particularly for higher-rate taxpayers.
Since coming into power, new chancellor Rachel Reeves has revealed a £22bn “black hole” in the UK’s public finances and has said some “difficult decisions about tax” will be included in her first Budget, which is set for October 30.
This could mean a U-turn on Labour’s pledge not to target “personal” tax rates, namely income tax, value-added tax (VAT), or national insurance contributions, as well as possibly targeting capital gains tax and inheritance tax.
Out of all the taxes on the chancellor’s agenda, income tax is the biggest earner for HM Treasury. It also causes the most pain for households. According to the House of Commons Library, income tax, national insurance contributions and VAT contribute around three-fifths of all revenues.
In 2023-24, £277bn was raised from income tax, £180bn from national insurance contributions and £170bn from VAT. And with income tax personal allowance and higher rate thresholds having been frozen since 2021, more people have found themselves in higher tax brackets, but with a lower standard of living.
What can clients do to pay less tax?
Financial advisers with higher-rate clients who would like to reduce some of their income tax burdens – whether through their salary, rental income or portfolios of assets – could consider a venture capital trust.
VCTs were introduced in 1995 and over the past three decades they have helped hundreds of thousands of UK investors to invest in ambitious high-growth companies while also claiming valuable tax reliefs, namely:
- Income tax relief: clients can claim up to 30 per cent upfront income tax relief on the amount invested, provided shares are held for at least five years.
- Tax-free dividends: any dividends paid by the VCT are tax-free.
- Tax-free growth: VCT investment returns are free from CGT.
Claiming tax relief on earned and unearned income
Earned income is essentially the income received through salary, wages and bonuses, or money made from self-employment. By contrast, unearned income includes things like investment or rental income.
Therefore, clients should be reminded that while a VCT gives them the ability to claim upfront income tax relief, the relief claimed can be applied to all forms of income tax paid, including tax on dividends and rental income.
This can be extremely useful in cases where clients own a property portfolio or large share portfolio and, therefore, face a potentially higher income tax bill as a result.
How clients claim income tax relief on a VCT investment
Once the VCT investment has been made, the client receives two certificates in the post. Their VCT tax certificate allows them to claim income tax relief from HMRC, and their VCT share certificate should be held onto until they choose to sell their VCT shares.
Clients should be made aware that there’s a £200,000 maximum VCT subscription limit for claiming income tax relief in a single tax year, which means a maximum of £60,000 income tax relief can be claimed each tax year.
However, the amount of income tax relief is directly linked to their income tax liability. In other words, they cannot claim more tax relief than the amount of income tax they owe.
