WITH the General Election campaign now in full flow, tax has come sharply into focus.

In particular, the Labour Party has set out plans to hike income tax rates for anyone earning over £80,000 as well as proposals to align the tax treatment of capital gains and dividends to income tax rates.

In contrast, the Conservative Party has pledged to increase the threshold at which national insurance kicks in over time, which is in effect the equivalent of a modest tax cut.

In truth, with all the political parties outlining a range of big spending commitments, the prospect of affluent families receiving significant income tax reductions any time soon looks remote.

On the contrary, for some it looks likely that the burden of tax could be set to rise significantly.

A record 4.26 million people are already paying tax at the higher rate and the Institute for Fiscal Studies has estimated that 1.6 million would see the amount of income tax they pay rise under Labour’s plans.

Against this backdrop, is there anything that can be done by those who want to mitigate a high income tax bill?

Contributing to a pension has long been the main route to do this, since pension contributions attract tax relief at the investor’s marginal rate.

Pensions remain incredibly attractive from this perspective and despite perennial speculation that these generous reliefs will eventually be scrapped, none of the major parties have spelled out any plans to do that.

For the highest earners, access to pension tax reliefs have already been heavily restricted in recent years through changes to annual and lifetime allowances.

There will also be people who want to reduce an income tax liability, but who are reluctant to tie their capital up until retirement.

For these people, investment into venture capital trusts (VCTs) might be worth exploring.

VCTs are investment companies, listed on the stock market, which invest in unquoted or AIM-traded fledgling UK businesses.

These are the types of small, growing enterprises that successive governments have wanted to support since VCTs were first introduced in the mid-1990s.

To incentivise investment into VCTs, investors are rewarded with a cocktail of tax reliefs.

These include an income tax credit of 30 per cent on subscriptions to VCT new share issues (repayable if the shares are sold within five years), as well as tax-free dividends and gains.

VCT investing can therefore help reduce an income tax liability, lopping the equivalent of £3,000 off a tax bill, for every £10,000 invested.

Of course, there is no such thing as a free lunch: the reason VCTs are provided with such tax incentives is because the investments they make are illiquid and higher risk.

VCTs are not for everyone and it is important to only consider allocating a small part of an overall portfolio to them.

However, for the right investor these can help both reduce an income tax liability and provide exposure to dynamic, younger companies and the potential for tax-free returns.

The types of businesses backed by VCTs, while relative minnows, are nevertheless a far cry from the start-ups you might see on Dragons’ Den.

These are typically innovative businesses, that have a proven product or service and are already generating revenues by the time a VCT invests in them to help them grow.

One such example is Velocys, an Oxford University spin-out, that has been backed by the Amati AIM VCT.

Velocys has developed a process to convert solid waste into liquid fuels with a significant reduction in greenhouse gas emissions compared to traditional techniques.

Another is Access-IS, a data capture technology business, backed by the Mobeus VCTs, whose passport and boarding card scanners are now in over 200 airports across the globe.

It is true that VCT businesses will be small and based in the UK, but they are often early-stage companies that have global ambitions.

Unlike most investment funds that are open all year round, VCTs will only periodically raise new cash from investors as and when they identify a pipeline of new deals or want to provide further finance to help the business they have backed to expand.

The good news for investors enticed by the idea of big tax breaks for investing in small companies is that there are currently over a dozen VCT offers seeking cash, with new issues from the likes of Amati AIM, the Albion VCTs, the Mobeus VCTs and Octopus Titan, each of which are highly rated.

Jason Hollands is managing director of investment and financial planning group Tilney.