Planning for medical professionals

It’s increasingly difficult for high-earning National Health Service (NHS) professionals to make more contributions to their generous salary-linked NHS pension schemes. With relatively high and steady incomes, many are now looking for alternative ways to invest for the future.

This tax-planning scenario explains how medical professionals could use a Venture Capital Trust (VCT) to offset income tax on their various income streams.

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About this planning scenario

Andrea needs a tax-efficient way to invest additional income

Andrea, 59, is a successful surgeon and higher rate taxpayer on the salary-linked NHS pension scheme. She’s started to draw down some of her pension each year while also earning a high salary.

Since adding her pension to her income, Andrea has a lot more disposable cash. Because she’s restricted in what she can pay into her pension, she’s looking for other tax-efficient options to invest this additional income.

Andrea would consider investing in smaller UK companies and is comfortable with the associated investment risk.

Andrea’s financial adviser suggests investing in a VCT

Andrea talks to her financial advisor, who makes an assessment based on:

• Her risk profile
• Her investment time horizon: more than five years
• Her attitude towards investing in smaller companies

Based on those factors, Andrea’s adviser suggests investing in a Venture Capital Trust (VCT). With a VCT, Andrea can claim up to 30% income tax relief on up to £200,000 invested in any single tax year, as long as she holds her VCT shares for at least five years. Andrea can also benefit from tax-free dividends, and won’t have to pay capital gains tax when she sells the shares.

After five years, Andrea could sell her first VCT investment, then reinvest any proceeds in another VCT and use the additional income tax relief to reduce her year six income tax bill.
Similarly, Andrea could sell and reinvest her year two VCT investment in another VCT in year seven, giving her additional income tax relief. She could then continue doing this each year.

Tax benefits of investing in a VCT

This flow chart shows how Andrea can claim income tax relief from each VCT investment she makes across several consecutive tax years. We’ve used six years as an example but in practice she could use this method to keep claiming income tax relief indefinitely. This is, of course, subject to certain conditions including the requirement to hold VCT shares for at least five years in order to retain the 30% upfront tax relief. If an investor needs guaranteed income, cannot tolerate loss or is uncomfortable losing immediate access to their money, then VCTs are not suitable.

Note: Tax rates and allowances are correct for the tax year 6 April 2023 – 5 April 2024. For purposes of this illustrative example, we have assumed no gain or loss on investments, and it does not take into account any initial fees or ongoing charges that will be incurred. VCTs are high risk and inherently different from pensions and ISAs. When clients choose to sell VCT shares, they are often sold at a small discount to the value of their underlying net asset value, so the impact of this should also be considered when assessing any specific products. Please note, after selling shares in a VCT, it is not possible to claim tax relief on new shares bought in the same VCT within six months of the initial sale.

Before investing in a VCT, investors should read the product prospectus and Key Information Documents (KID).

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