For professional advisers and paraplanners only. Not to be relied upon by retail clients.
This year's Budget drew a clear line between the Government's ambition to ignite UK growth and the reality of a tightening personal tax environment. On one hand, the Chancellor reinforced her commitment to early-stage British businesses, doubling investment limits for VCTs and extending key incentives that keep capital flowing into innovation. On the other, she confirmed a series of personal tax changes that - while incremental in isolation - collectively signal a continued squeeze on.
For advisers, the combination of shifting private-market policy and personal tax legislation changes presents both a challenge and an opportunity. Clients will need more support than ever to navigate a rapidly shifting environment and build robust, tax-efficient long-term plans. Below, we explore the key changes and what they mean in practice.
VCTs enter a new chapter
The government's expansion of VCT eligibility tests for investee companies, including the doubling of annual and lifetime funding limits, is one of the most significant policy shifts for the sector in recent years. These measures modernise long-outdated caps and reflect the rising cost of scaling early-stage companies. Crucially, they also reinforce the pipeline of patient capital that helps founders progress from seed to Series B and beyond - precisely where a clear funding gap has emerged for ambitious UK scale-ups.
This renewed policy direction is part of a broader, sustained effort to strengthen the UK's growth ecosystem. The extension of the EIS and VCT sunset clause to 2035, increased backing for initiatives such as the National Wealth Fund and British Growth Partnership, and the momentum behind the Mansion House Accord - which will see major DC pension schemes allocate 10% of default funds to private markets by 2030 - all point to a more joined-up approach. Together, these developments signal a long-term commitment to ensuring innovative businesses can access the capital they need to thrive in the UK.
However, the Budget also introduced a change from 6 April 2026 - the rate of upfront income tax relief on VCTs will fall from 30% to 20%. While this is undoubtedly a disappointment for both investors and advisers, it creates a meaningful window of opportunity in the near term. Clients who invest this tax year can still secure the higher relief, while also benefiting from the other tax advantages on offer, such as tax-free growth and dividends.
Even beyond this transition, VCTs will continue to play an important role within tax-efficient planning. In an environment where allowances are tightening and the overall tax burden remains high, few options offer a similar blend of long-term return potential, direct access to private markets and favourable tax-free dividend treatment. For many clients, that combination will remain increasingly valuable.
A tax environment that continues to tighten
Here are some of the main changes to tax legislation that advisers will need to consider:
- Income tax will be frozen until 6 April 2031, steadily pushing more earners into higher tax bands as wages rise.
- Dividend tax rates for basic and higher rate taxpayers will increase by 2% from 6 April 2026, with higher taxes on savings and property income to follow in 2027.
- Cash ISA allowances will be cut to £12,000 from 6 April 2027 for those under 65, significantly reducing the amount that can be sheltered tax-efficiently.
- Pension salary sacrifice will be capped from 6 April 2029, limiting National Insurance-free contributions to £2,000, although income tax relief on pension contributions is unchanged.
Taken together, these measures highlight a clear trend that more people are facing a higher tax burden and an increased squeeze on overall tax-efficiency of investments. This means advisers will increasingly need to diversify tax wrappers to maintain balance across clients' financial plans.
Private markets are becoming an essential part of diversified long-term investing
Private markets have historically outperformed public listed markets over the long term[1], offering investors the chance to access growth and innovation. Beyond familiar names that making headlines, there are many fast-growing private companies driving technological and commercial breakthroughs behind the scenes.
For suitable investors comfortable with high-risk investments, this means the potential to participate in some of the world's most innovative businesses at an early stage, capturing returns that are often uncorrelated with public market performance. Exposure to these companies can provide valuable diversification and differentiated returns within a portfolio, particularly as public markets become more concentrated and dominated by a small number of mega-cap stocks in the technological arena.
VCTs in particular provide one of the few practical routes for retail investors to gain meaningful access to these private opportunities. By including private market investments alongside traditional assets, advisers can offer clients a more balanced, forward-looking strategy that taps into growth potential not captured elsewhere.
Supporting advisers in 2026 and beyond
In this evolving landscape, with a high-tax burden and incoming changes to pensions from April 2027, advisers are considering a wider range of tax-efficient solutions. VCTs, in particular, are becoming increasingly important, offering a complementary solution for clients in the wealth accumulation and decumulation stage to work alongside their pension planning.
At Octopus Investments, we're committed to supporting advisers, and our Budget 2025 Hub is now live. It brings together expert analysis, practical guidance and key resources to help you understand this year's announcements, navigate a shifting tax landscape and identify tax-efficient opportunities that support both your clients and the next generation of growing British businesses.
Risks to consider:
· The value of a VCT investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
· Tax treatment depends on individual circumstances and may change in the future.
· Tax reliefs depend on the VCT maintaining its VCT-qualifying status.
· VCT shares are by their nature high risk, their share price may be volatile and they may be hard to sell.
VCT investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Personal opinions may change and should not be seen as advice or recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No. 03942880. December 2025. CAM015540.
[1] Private Capital continues to outperform public markets over the long term, despite a more challenging 2024, BVCA, June 2025
