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Case Study: Investing in a VCT for income tax relief

Jacob is looking to reduce his income tax liability

Jacob is a 64 year old sales director, with overall wealth in excess of £3million including property. He earns £295,000 in 2016/17 and wants to reduce his liability to income tax. He applied for fixed protection in 2014, meaning that he can no longer make contributions into his pension.

Ordinarily, he will have to pay a total of £118,850 in income tax on his earnings of £295,000.

No personal allowance

Due to his level of income, his has lost his personal allowance. This means that all of his income is taxed; therefore, on the first £32,000 of his income, he will pay basic rate tax at 20% amounting to £6,400. On the next £118,000, he will pay higher rate tax at 40% amounting to £47,200. On the top £145,000, he will pay additional rate tax at 45% amounting to £65,250.

30% upfront tax relief

Jacob receives a bonus on top of his salary, most of which is surplus to his requirements. Therefore, he invests £185,000 into a VCT during the 2016/17 tax year. He receives income tax relief at the rate of 30% of his investment. The tax relief therefore reduces his income tax liability by £55,500, from £118,850 to £63,350.

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