Entrepreneurship- changes to tax rules in the 2025 Budget 

There are three key changes to the tax law around entrepreneurship arising from the UK Budget – two reflecting expansions to beneficial tax arrangements and one tightening.  

The changes are: 

• Extending the limits so that more companies can implement enterprise management incentive (EMI) share option plans 

• Extending the limits so that more companies can raise enterprise investment scheme (EIS) and venture capital trust (VCT) funds 

• Increasing the capital gains tax for transfers of shares into employee ownership trusts (EOTs) 

EMI changes

The most significant changes are to the EMI qualifying status. Currently companies have a limit of £30m gross assets and 250 full time equivalent employees in order to implement an EMI share option plan. The new limits will be £120m gross assets and 500 employees. In addition, the total value of options (at the point of grant) is now limited to £6m instead of £3m, so potentially increasing the number of participants in the plan and the ‘lifetime’ of the options has been (retrospectively) extended to 15 years.  

This is all good news in that more companies should be able to participate in EMI plans. We regularly speak to companies who are restricted from using EMI by the gross assets test, for example those with substantial PE backing with the investment cash putting them over the limit, or where they have grown organically over many years and have built substantial balance sheets. Expanding the limits so substantially should bring a lot more companies into the scope of EMI. 

Of course, these limits should probably have been raised long ago – they have been in place for many years and inflation has gradually eroded the gross assets limit. I am surprised though that the limit has been quadrupled. It seems to be a clear statement from the government that they wish to expand the type of companies who can participate in these schemes, not just ‘catch up’ to where the figures would have been with inflationary increases.  

Personal grant limits remain unchanged

It’s interesting that the personal grant limits for EMI share options haven’t been extended – they remain at £250,000 which is a figure that most people have regarded as generous. Presumably the government isn’t inclined expand the value of tax advantaged share options available to those they already consider to be fortunate. 

Additional benefits of EMI schemes

As a specialist in employee share plans I’m often asked what choices we can offer to companies and of course there are a number of tools available to us for employee share plans. However, EMI, which was introduced in the year 2000, is still considered to be the gold standard. That is because it is both relatively generous and flexible. The company can choose who participates and there is no commitment from the employee at the point of acquiring the shares (no cash or loans upfront). At the end point (e.g. on a future sale) the employee can benefit from a capital gains tax disposal reflecting the growth of value in the shares from the point that they were granted as options. This offers a meaningful tool for recruiting retaining and incentivising staff in UK companies.  

Could the government have gone further?

In terms of what I might like to have seen – I frequently talk to clients who meet all the other qualifying criteria but have a personal holding company on top of their trading company. If they wish to grant options in the trading company this is prohibited by the independence test (EMI options cannot be granted in subsidiary companies). They could of course grant options in the holding company, but this requires more thought and may not be desirable. Some sort of EMI solution for this group would be very helpful….maybe in the next Budget? 

EIS and VCT changes

Turning to EIS (and VCT). These schemes offer significant tax breaks to individuals where they invest in high risk, early stage companies. The changes here are also significant. The annual limits for funds that companies can raise is doubling from £5m for ‘regular companies’ and £10m for knowledge intensive companies to £10m and £20m respectively. The lifetime limits are also increasing – from £12m and £20m to £24m and £40m.  

Finally, the gross assets test for EIS companies will double from £15m to £30m (£35m post raise) enabling companies with larger balance sheets to access both the EIS and VCT schemes. This increases the scale of the companies who are able to undertake EIS/VCT raises.  

In terms of the companies that we see raising funds, this will be helpful – those with a longer lead time and more complex R&D to undertake may take longer and spend more money before they become viable. For instance, pharma companies or companies solving complex technical issues – both often need a large amount of funding to get from idea to product.   

One small fly in the ointment is that the VCT income tax relief will be reduced from 30% to 20%. EIS in unchanged – given the EIS funds generally go to smaller and higher risk companies this may be appropriate. It seems likely that there will be a rebalancing towards more EIS funds and away from VCT funds.  

Was there potential for broader change?

Turning to my wish-list – we see a lot of companies who were not aware of EIS when they started up and have grown very slowly using the owner’s capital. They may get to the end of the initial seven-year period during which EIS can be accessed, before they were aware that it existed. Finding a route to get EIS funds to these companies could be very helpful in driving successful entrepreneurship in the economy.  

EOT changes

EOTs were introduced in 2013 and, from a slow start, in recent years we have seen a lot of EOTs being implemented. For a vendor they currently offer the most attractive tax treatment of any sale mechanism – especially with business asset disposal relief (entrepreneurs’ relief as was) having been eroded in value in recent years.  

Previously a sale to an employee ownership trust was exempt from capital gains tax. In the changes being introduced, the relief is being halved i.e. half of the gain will be exempt with the balance being subject to the main capital gains tax rates (usually 24%). This may deter some vendors other than those who have a real interest in employee ownership.  

What this means for entrepreneurs

In summary, support to early-stage companies is being extended to capture a wider, likely older group of companies. Added to the changes last year to capital gains tax (in effect moving the business asset disposal relief rate to 18% from 6 April 2026, instead of 10% on the first £1m of gain and taxing the excess at 24%) might this mean longer holding periods before companies are sold?  

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