Rachel Reeves is facing renewed scrutiny over Labour’s economic strategy after key tax-efficient investment schemes showed only limited growth despite repeated promises to unleash business investment.
New figures reveal investments into companies qualifying for the Enterprise Investment Scheme (EIS) remained flat at £1.6bn during the 2024/25 tax year, highlighting continued caution among investors and entrepreneurs amid mounting economic uncertainty.
The EIS, designed to encourage investment into higher-risk smaller businesses through generous tax reliefs, has long been regarded as a key barometer of confidence in Britain’s startup economy.
While ministers have repeatedly argued Britain remains one of the best places in Europe to start and scale a business, the latest figures suggest investor appetite has yet to recover meaningfully.
Data also showed investment through the Seed Enterprise Investment Scheme (SEIS), which focuses on very early-stage companies, rose from £242m to £276m during the year.
Meanwhile, Venture Capital Trust (VCT) investment increased only modestly from £872m to £881m.
Although the increases in SEIS and VCT funding were welcomed by industry figures, the broader picture suggested a startup investment environment still struggling to regain momentum after years of political instability, higher interest rates, and weak economic growth.
Entrepreneurs and investors have warned that Britain risks losing ground to international rivals unless ministers provide a more stable and competitive tax environment.
Concerns have also grown over the wider direction of Labour’s economic policy, with some business leaders warning that higher employment costs and increased regulation risk discouraging investment into smaller growth companies.
Critics said flat EIS investment was particularly concerning given the scheme’s central role in funding innovative firms that often struggle to access traditional bank lending.
The figures are likely to intensify pressure on Ms Reeves to demonstrate that Labour’s pro-growth agenda can translate into stronger private-sector confidence.
The Chancellor has repeatedly argued that economic stability is the foundation for long-term investment, insisting the Government is creating the conditions for sustainable growth.
However, business groups say investors remain cautious amid concerns over weak consumer demand, global instability and the rising cost of doing business in Britain.
Some investors also warned that global competition for capital has intensified sharply, with startup ecosystems in the United States, the Middle East and parts of Asia increasingly attracting international funding that may previously have flowed into Britain.
Even so, supporters of the schemes argued the resilience of SEIS investment suggested early-stage entrepreneurship in Britain remained strong despite the challenging backdrop.
The increase in seed-stage funding may also indicate investors are continuing to back innovative startups while becoming more selective about scaling larger businesses through later funding rounds.
Industry leaders said the coming year would be critical in determining whether Britain can re-establish itself as one of the world’s leading destinations for entrepreneurial investment or whether confidence continues to stagnate.
Jonathan Moyes, Head of Investment Research at Wealth Club said: “Funding for ambitious startups through the UK’s Venture Capital Schemes continues to stagnate, which will be a blow to the innovation economy, and efforts to propel growth across the nation as a whole.
The two main schemes, VCTs and EIS, were broadly flat over the period, whilst SEIS, historically an area of strength, saw growth slow to 14%, down from 51% in the year prior.
The UK venture capital ecosystem continues to endure a hangover following a tough period for investors in early-stage technology businesses. The period of higher inflation and interest rates that followed the war in Ukraine brought with it a period of significant market volatility. This continues to affect investor sentiment.
However, the schemes continue to be a vital source of funding for UK startups, particularly as other sources of funding dry up. Beauhurst research shows that total investment into UK private companies fell by a further 5% in 2024 after a gruelling 42% drop in 2023. The reduction in funding from the wider market is far larger than we have seen through the Venture Capital Schemes, suggesting the schemes are proving to be a more resilient source of funding for UK startups.
SEIS is typically always a bright spot. The UK has a range of good quality SEIS funds, incubators and accelerators that all help to helping to create a thriving environment for the earliest stage companies. The continued growth in SEIS is in part due to the decision in 2023 to increase the amount companies can raise through SEIS from £150,000 to £250,000. Several SEIS funds are also able to invest British Business Bank capital alongside these SEIS investments to further boost the cheque size for fledgling businesses.
The government will be hoping a similar move in EIS, where the amount companies can raise through EIS has recently doubled, will have a similar effect in turbocharging the funding for the UK’s brightest startups.
But it may be wishful thinking. This snapshot shows that the innovation economy sorely needs a leg up to help boost growth. It comes as there is a significant challenge facing the VCT market given than income tax relief on investments fell from 30% to 20% from last month.
History shows the potential consequences of such a move. The last time income tax relief was reduced, in 2006/07, VCT fundraising fell by 65% year-on-year. While the impact this time may be less severe – given today’s higher tax environment and fewer alternative tax-efficient investment options – we still expect a material decline in annual VCT investment.
This would be a negative outcome not only for investors, but for the broader UK economy. VCTs have been one of the UK’s most successful long-term investment schemes, supporting thousands of growing businesses and contributing meaningfully to employment and economic expansion.
We struggle to see the logic behind this policy decision. The projected tax revenue gain is relatively small – around £120 million per year – yet the potential damage to the funding ecosystem for start-ups and scale-ups, and the knock-on effects for growth and job creation, could be far greater. It’s time to reconsider this reduction in tax relief and continue to support a scheme that has delivered clear and lasting benefits to the UK economy.”
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