Draw a higher tax dividend out with a 2.5% tax rate

No one likes giving up a proportion of their earnings to the tax man, and every business is looking for ways in which they can save on tax.

If you’ve already maximised your tax-free pension allowance, and have filled your ISAs, you’d be forgiven for assuming you’ve exhausted all tax relief options available to you and your dividends.

But there are some lesser-known schemes out there that allow you to reduce the amount of tax you have to pay – so, what measures can you take and how might they work for you?

Tax-efficient investments

When it comes to tax relief, where you put your money matters.

So whether you have experience in investing your money, or have never considered it as an option before, there are certain government initiatives in place that are based on high risk ventures, which could stand to benefit you and your business.

For instance, could you take advantage of a dividend tax rate as low as 2.5%?

Investing in higher risk VCTs (or Venture Capital Trusts) is one such scheme that carries with it an appealing 30% tax relief, designed as an incentive to encourage private investment in smaller companies.

So, how does it work?

In short, if you invest up to £200,000 in a VCT that you hold for at least 5 years, the government will provide you with an income tax relief of 30% on that investment.

In real terms, that means that a £10,000 investment could cost you only £7,000.

What’s more, no capital gains tax is due on profits from the investment, and dividends are tax-free and don’t have to be recorded on tax returns.

Those that comply with the regulations will receive a credit against their tax liability to 30% of the amount invested. So, if you currently pay dividend tax on a higher rate of 32.5%, you’ll effectively reduce your tax rate to just 2.5%.

What’s the catch?

Of course, this generous tax relief isn’t just some charitable gesture from HMRC for those that want to save money on their tax bill. The tax break is on offer because you’ll be investing in higher risk funds – so, while you have the opportunity to earn back potentially higher returns, it’s possible that you’ll get back less than you invested.

*This blog does not constitute financial advice, Chippendale and Clark are not regulated to give financial advice and we offer this information as a guide to obtain a tax advantage. Advice from a Chartered Financial planner must be taken before any investment is considered. Your use of the information on the website or materials linked from the Web is at your own risk. Chippendale and Clark will refer you to a trusted financial planner if you so desire.

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