Published: Mar 11, 2026
Focus:
Growth Capital
Since the Venture Capital Trust (VCT) scheme was first launched by the Government back in 1995, VCTs have been fundamental to powering UK early stage and growth focused businesses. Across the Maven VCT portfolio alone, around two thirds of the private companies backed since 2015* have increased revenues by more than 100%.
Data recently compiled by the Venture Capital Trust Association (VCTA)1 shows that VCT capital delivers far more than funding alone. It helps creates jobs, attracts follow-on investment, strengthens governance, and provides strategic and operational expertise. VCTs also fill a critical funding gap for many emerging business which are not yet high-growth or profitable enough to attract private equity investment.
While the recent Government announcement to increase the annual and lifetime fundraising limits on what VCTs can invest in a company have been widely welcomed and highlights the vital role of VCTs in supporting ambitious UK businesses, the parallel cut in tax relief from 30% to 20% taking effect from April 2026 risks significantly impacting the intended benefit of those increased limits.
The demonstrable impact of VCTs on early-stage businesses
The VCTA report showcases the significant economic contribution of VCT backed businesses which, since 2016, have generated £18.5 billion in revenues, delivered £3.9 billion in exports, and invested £343 million in R&D. Those businesses also currently employ approximately 100,000 people across the UK. This underlines the importance of VCT funding in supporting high growth, high productivity companies that employ skilled labour and pay salaries in excess of regional averages in almost every part of the country.
The report is also clear that VCTs take on genuine early stage risk. Nearly 45% of first-time investments go into companies with under £1 million in revenue, and on average VCT backed businesses have just 32 employees at the time of investment. Few other segments of the UK financial ecosystem are prepared to take that level of risk.
The survey also shows that the founders of VCT-backed businesses themselves consistently describe the funding as ‘critical to growth’. In fact, 68% say it was extremely important in scaling their company, rising to almost 80% for those that have successfully exited. Many describe VCTs as essential to avoiding the ‘valley of death’ - the gap between very early stage angel/EIS funding and traditional private equity, which often demands higher growth trajectories than many emerging firms can demonstrate in the early years.
Smaller companies typically require more than just funding as they scale and need a close level of support. Active portfolio management is crucial in driving value, and established VCT managers can provide access to senior talent, operational and strategic support, crucial market insight, enhanced governance, and board-level guidance. 79% of founders say VCT funding enabled senior hiring, 77% report stronger governance, and 64% benefited from strategic mentoring. For many, this support is as valuable as the capital itself.
Unsurprisingly, when asked how the business would have fared without VCT support, over 80% of businesses said their growth would have been negatively affected, and over a quarter outside of London said they would likely not be in business at all.
Why the increased VCT investment limits matter
The Government’s decision to raise annual and lifetime VCT investment limits on the levels of VCT funding available to companies has been welcomed. The VCTA data reveals that a quarter of companies backed through the scheme have already hit investment caps, with the constraint most pressing for companies with a turnover of more than £5 million. Increasing these limits will now allow VCT managers to continue supporting firms at precisely the stage of growth where it is needed most.
In short, the increase in limits directly addresses a practical barrier that was slowing the growth of some of the UK’s most dynamic businesses.
However, the reduction in tax relief could undermine that benefit
History suggests that the April 2026 reduction in income tax relief from 30% to 20% is likely to lead to a sizeable fall in future fundraising which will have a direct negative impact on new investment activity in the very companies the Governments wants to support.
The impact is expected to mirror what happened following the previous tax relief reduction from 40% to 30% in 2006/07, when fundraising contracted sharply and remained subdued for a number of years.
The 2022 Kantar Public evaluation of Enterprise Investment Scheme (EIS) and VCT schemes2 examined investor motivations and found that 89% of VCT investors consider tax relief as one of the most important reasons for investing and that should there be a cut to reliefs that would make them ‘a lot less likely’ to invest.
A more recent survey by Wealth Club4, the UK’s largest non-advisory investment service for high net worth and experienced investors, found that 85% of investors expect to stop or reduce VCT investing following the proposed cut, and that 96% want Government to reconsider the decision.
The consequence of reduced inflows of private capital from UK investors will likely see VCT managers prioritise existing portfolio companies and share buybacks. The VCTA data estimates that at least £550 million will be required in 2026/27 just to meet follow on investments and buybacks to ensure a level of liquidity for investors. Any decline in fundraising will likely mean the capital available for new deals will reduce first and fastest. If that happens it will disproportionately and directly harm the youngest companies which are the most dependent on this early-stage capital and expert support.
The VCTA data reinforces this. Younger companies are the most concerned, with 65% of firms under five years old expecting to be negatively affected. Over 60% say they would scale back growth if VCT funding were not available, 45% would reduce headcount, and one in four would consider relocating their headquarters abroad.
The reduction in tax relief therefore appears to be self-defeating in the context of the package of growth measures recently announced by the Department for Business and Trade3 to “ensure that promising UK businesses can scale up at home rather being forced overseas”.
A double-edged sword
Taken together, the policy changes suggest the UK ecosystem for scale ups is at a critical inflexion point. Raising VCT investment limits is a welcome and pragmatic intervention and reflects the realities of how ambitious companies scale and the capital they need to sustain innovation. Yet this positive step risks being undermined by the reduction in tax relief, which is a proven mechanism for attracting private capital into early-stage investment.
VCTs have long played a vital role in enabling emerging UK businesses to grow, create jobs and evolve into larger, more valuable enterprises. The concern voiced by founders, entrepreneurs and investors is understandable and is backed by data from across the industry which shows that without strong incentives, the risk reward balance for investors is much less attractive and is likely to result in capital being deployed elsewhere.
*Excludes 6 investment made in the 12 months to September 2025, for which was too early to measure meaningful growth.
Sources
4https://ifamagazine.com/85-will-invest-less-or-nothing-at-all-in-vcts-next-year/
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