Think of a VCT as being an alternative to a pension or ISA if you’re looking for tax-efficient ways to grow your money. The main tax break, as confirmed in Rachel Reeve’s recent budget announcement, is that you can claim back up to 20% of the investment against your income tax bill if you hold the shares in your VCT for at least 5 years.
Any dividends you receive from those shares are tax-free and if the value of those shares goes up, you do not have to pay Capital gains Tax when you sell them.
Compare that to a Pension or ISA where the pension will lock your money away until retirement and although an ISA will offer you tax-free growth and income, it won’t offer you that upfront 20% tax relief.
Here’s what they look like alongside each other:
| Investment | Upfront Tax relief | Growth/Income Tax | Access Rules | Risk Level |
| Pension | 20/40% (depending on tax band) | Tax free growth, but taxed when you draw income | Locked until retirement age | Low - medium |
| ISA | None | Tax free growth and withdrawals | Flexible — you can take money out anytime | Low - medium |
| VCT | 20% Income tax relief (£2,000 back on £10,000) | Tax free dividends and no capital gains tax | Must hold for 5 years | High |
What is the trade-off?
The catch is risk. Small companies can fail, so VCTs aren’t as safe as a pension or ISA. But if you’re comfortable with that, the rewards can be attractive.
In simple terms: VCTs give you decent tax breaks and a chance to back the UK’s next generation of businesses. They’re riskier than pensions or ISAs, but more flexible and potentially more rewarding.
We recommend that before you invest, you seek professional advice.