Imagine you’re a high-growth British tech founder who’s just heard the Chancellor promise to “supercharge” support for scale-ups. You’re grinning, popping the champagne – until you read page 187 of the Budget documents and discover the government just quietly slashed the tax relief that makes people invest in companies like yours. That sting you’re feeling? That’s exactly what thousands of entrepreneurs and investors felt last month.
Rachel Reeves’ Budget: Giving With One Hand, Taking With The Other
Everyone expected Labour’s first Budget in 14 years to raise taxes. What caught the startup world completely off-guard was how cleverly the Treasury managed to look pro-growth while simultaneously pulling the rug from under one of Britain’s most successful innovation funding mechanisms.
On the surface, the changes to Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) sounded fantastic. Wider eligibility, higher investment limits, more support for “knowledge-intensive” companies. Who could argue with that?
Then came the fine print: the 30% upfront income tax relief that has made VCTs irresistible to wealthy investors for decades is being cut to 20% from April 2026. It’s classic budgetary sleight of hand – announce something that sounds generous while quietly removing the incentive that made the whole system work.
Why VCTs Have Been Britain’s Secret Startup Weapon
Let’s be honest – most people outside the investment world have never heard of Venture Capital Trusts. Yet these somewhat obscure vehicles have been quietly channeling billions into British startups and scale-ups for years.
The deal has always been beautifully simple. Investors get 30% of their money back immediately as tax relief, all dividends are tax-free, and there’s no capital gains tax when they sell. In return, they take the considerable risk of backing young, unlisted companies.
It’s worked brilliantly. These aren’t just rich people getting richer – they’re providing the patient capital that banks won’t touch and traditional venture funds often can’t justify for British companies trying to scale.
The tax relief isn’t a perk for the wealthy – it’s the price the government pays for directing private capital into the riskiest but potentially most valuable part of our economy.
The Numbers Don’t Lie – And They’re Worrying
History provides a stark warning. When the government cut VCT relief from 40% to 30% in 2006, fundraising collapsed by 65%. It took over a decade to recover to previous levels.
We’re already seeing the same pattern. The day after the Budget announcement, some investment platforms reported application increases of over 500% as investors rushed to get in before the April 2026 deadline. This isn’t confidence – it’s panic buying.
Even before this cut, VCT fundraising was falling. The latest figures show £873 million raised in 2023-24, down 17% year-on-year. The number of individual investors claiming relief dropped 9% to just 24,085. These aren’t abstract numbers – that’s real money not reaching British companies.
- 2023-24: £873m raised (down 17%)
- Tax relief claimed: £810m (down 19%)
- Individual investors: 24,085 (down 9%)
- Average investment size actually increased – meaning fewer people are participating
The Treasury’s Clever Accounting Trick
Here’s where it gets particularly galling for anyone who understands how this ecosystem works.
The Treasury is increasing the amount companies can raise through these schemes – doubling lifetime limits to £24 million (£40 million for knowledge-intensive companies) and annual limits to £10 million (£20 million for knowledge-intensive). This costs the government money in lost tax revenue.
But they’re more than offsetting this cost – and actually making a profit – by cutting the upfront relief from 30% to 20%. Their own figures show they’ll be £125 million better off in 2027-28, then £95 million better off in each of the following two years.
In other words, the Treasury has found a way to look like it’s supporting scale-ups while actually extracting more money from the system than it’s putting in. It’s financially astute. Whether it’s good policy is another question entirely.
What This Means For Different Players
The impact varies dramatically depending on who you are.
Early-stage startups: Actually, not much changes. These companies typically raise smaller amounts and will continue to benefit from EIS, which keeps its 30% relief intact.
Scale-ups needing £5m-£20m rounds: This is where the pain will be felt most acutely. These are exactly the companies Britain has historically struggled to fund – too big for angel investors, too small or too British for international VCs.
Investors: The maths is brutal. A £200,000 investment currently gives £60,000 back immediately. From April 2026, that drops to £40,000. That’s £20,000 less reason to take the considerable risk of backing unlisted growth companies.
The Treasury: Wins financially in the short term, but risks damaging one of Britain’s genuine competitive advantages in the global innovation race.
| Player | Impact | Severity |
| Early-stage startups | Limited direct impact | Low |
| Growth-stage companies | Significant funding gap risk | High |
| Wealthy investors | Reduced incentive | Medium-High |
| Treasury revenue | £315m gain over 3 years | Positive |
| British innovation ecosystem | Potential long-term damage | High |
The Bigger Picture Nobody’s Talking About
Perhaps the most frustrating aspect is the mixed messaging. The government talks endlessly about making Britain a science and technology superpower, about competing with America and China, about building the next generation of world-leading companies.
Yet when push comes to shove, they reach for the low-hanging fruit of tax relief cuts that hurt precisely the companies we need most. It’s death by a thousand cuts for British ambition.
We’ve seen this movie before. Britain invents the technology (graphene, DNA sequencing, the web itself) then watches other countries commercialise it better. One of the few areas where we’ve been genuinely competitive is in creating an environment where private investors will back high-risk, high-growth companies.
This change risks throwing that advantage away at exactly the moment when we need it most.
Is There Any Silver Lining?
To be fair – and this is important – the increase in investment limits is genuinely helpful. Many companies have been hitting the previous caps, particularly in deep tech and life sciences where development timelines are long and capital requirements huge.
The changes to qualifying rules will also allow more established businesses to access this capital, which could help bridge the notorious “valley of death” between early-stage funding and being attractive to institutional investors.
But – and it’s a massive but – this only works if the money actually flows. Higher limits are meaningless if investors decide the risk/reward equation no longer stacks up.
What Happens Next?
We’re already seeing the early signs of trouble. The rush to invest before April 2026 will almost certainly create a cliff-edge effect, with fundraising likely to fall sharply once the new rules kick in.
The industry is lobbying hard for mitigation – perhaps grandfathering existing investors, or phasing the reduction more gradually. Whether the Treasury listens remains to be seen.
In the meantime, British scale-ups face another hurdle in what’s already one of the most challenging funding environments in years. International investors continue to favour American companies, interest rates remain elevated, and now one of our home-grown funding sources is being deliberately weakened.
The tragedy is that this wasn’t necessary. The amounts involved are trivial in the context of overall government spending. The Treasury will gain a few hundred million pounds while potentially costing the economy billions in lost growth.
Sometimes the cleverest accounting isn’t the smartest policy.
The British startup ecosystem has shown remarkable resilience in recent years. But resilience only goes so far when the government itself is making life harder. The next few years will tell us whether this was a minor hiccup or the moment Britain started falling behind in the global innovation race.
One thing’s for certain – the entrepreneurs building tomorrow’s world-leading companies deserved better than budgetary sleight of hand.
