Budget 2025: Venture Capital Implications

Some of the changes announced signal a shift towards the taxation of assets rather than just income alone. These changes, as well as the Enterprise Investment Scheme, Venture Capital Trusts and Enterprise Management Incentive changes, will have an impact on both venture capital investors and investee companies.

Enterprise Investment Scheme ("EIS") and Venture Capital Trusts ("VCT")

The Government announced changes to both the EIS and VCT rules, which had already been extended to 6 April 2035 in the 2024 Budget. These changes ensure that vital sources of finance for small and growing businesses remain available to increase those businesses’ capacity and enable follow-on investments. 

From 6 April 2026, the following changes will apply to both EIS and VCTs: 

• annual company investment limit: Increased to £10 million (from £5 million), and £20 million for Knowledge Intensive Companies ("KICs") (from £10 million);
• lifetime company investment limit: Increased to £24 million (from £12 million), and £40 million for KICs (from £20 million); and
• gross assets test: Increased to £30 million before share issue (from £15 million), and £35 million after (from £16 million).
  

However, the upfront income tax relief for individuals investing in VCTs will fall from 30% to 20%. This change is intended to better align the relief with EIS, which does not provide dividend relief, and to encourage VCT funds to focus on higher-growth companies.

Following the reduction in VCT relief, EIS funds may become more appealing to investors seeking to maximise upfront tax benefits. From 6 April 2026, EIS will retain the 30% income tax relief.  EIS funds typically allow pooled investments through a nominee, offering access to a diversified portfolio of early-stage companies similar to VCTs.

The changes also mean that start-up and early-stage companies will be able to access more tax advantaged capital and do so at a later financial stage in their growth. The clear political bet here is that rather than raising revenue directly, these changes will drive wider growth across the economy.

This shift could prompt some investors to move from VCTs, which remain attractive for tax-free dividends and greater liquidity, to EIS funds. Ultimately, the choice will depend on individual priorities around income, growth, and risk appetite.

Income tax – Dividend income

Because individuals who receive dividend income do not pay national insurance contributions, from April 2026, the basic rate of tax on dividend income will increase for all UK taxpayers from 8.75% to 10.75% and the upper rate will increase from 33.75% to 35.75%. The additional rate of 39.35% will not be changed.

Although this is a rise in income tax, it is economically equivalent to levying a flat 2% employee national insurance contribution on dividend income. The Government may have chosen not to raise the additional rate of income tax for dividend income in an attempt to provide some comfort and stability to high-income investors and business owners, amidst other tax measures targeting the wealthy. 

This increase was a surprise announcement in the Budget, although a reduction in national insurance and corresponding increase in income tax, which would have had a similar effect, was widely reported. The Government has noted in the Budget documents that over 90% of UK taxpayers do not receive taxable dividend income and that the additional revenue to be received from this tax increase is expected to come from the top 20% of the wealthiest households. The Government is therefore claiming to keep to its manifesto promise of not increasing taxes on working people and ensuring greater equity between the tax treatment of income received from employment and income received from assets.

However, the Office for Budget Responsibility has noted that this change is expected to result in some behavioural changes, such as individuals reducing their taxable dividend income.

Enterprise Management Incentive Changes

The number of companies in the UK that can utilise Enterprise Management Incentives ("EMI") will increase in April 2026 as a result of the Government increasing the thresholds for what constitutes a "qualifying company" for EMI purposes. 

The changes are:

• the limit on the value of company options able to be granted at any one time will be increased from £3 million to £6 million;
  
• the maximum value of a company's gross assets at the time of grant will be increased from £30 million to £120 million; and
• the maximum number of employees that a qualifying company can have at the time of grant will be increased from 250 employees to 500 employees.

The maximum period for holding an EMI qualifying option will also increase from 10 to 15 years.

The Government guidance suggests that if your company has existing EMI options that are due to lapse as the tenth anniversary of the date of grant is approaching, you could consider amending the scheme rules and option agreements to extend the holding period to take advantage of the new 15-year period.  HMRC has noted that such change would not result in the EMI options being considered to be surrendered and regranted.

The Government has also announced that the EMI notification requirements will also be removed from April 2027. This extends HMRC's previous changes to the EMI notification requirements. 

This is the first change to thresholds for what constitutes a "qualifying company" for EMI purposes since the EMI scheme was introduced in 2003. These increases are welcome and well overdue and will bring many larger companies within the scope of qualifying to grant EMI options. 

The EMI option scheme is generally considered to have been very successful since its introduction and provides companies and employees with significant tax advantages if the rules are followed correctly. We would encourage companies that may have discounted EMI options as they did not qualify  to reconsider. We would also encourage large companies  who, from April, will be within the scope of the EMI legislation and who are looking for ways to incentivise and retain staff to consider setting up an EMI option scheme.

Our Tax and Share Schemes team has extensive experience in establishing EMI schemes so please do get in touch with us if you would like to discuss this further.

DWF has the largest venture and growth capital group in the UK with over 85 lawyers in 10 offices, and supports investors and companies across several sectors including financial services, technology, media and telecommunications, life sciences and healthcare and real estate and infrastructure.

If you have queries on any of the issues covered in this article please contact one of our experts:  

For additional analysis affecting businesses, business owners and high-net worth individuals, please refer to our initial tax Budget analysis.