Brought to you in partnership with Foresight Group
Small and medium-sized enterprises (SMEs) are crucial to the UK’s economic prosperity, accounting for around 60% of private-sector employment and playing a central role in innovation. However, early-stage businesses frequently struggle to access capital. Anastasia Sagaidachna, Senior Investment Manager in the Ventures Team at Foresight, explores how high levels of uncertainty, limited collateral, and a lack of trading history make traditional lending difficult, while many investors are reluctant to commit funds to high-risk start-ups.
To address this structural funding gap for private investments, the UK government established Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs). These incentives encourage individuals to invest in early-stage, innovative companies by offering tax reliefs that compensate for the risks involved. In doing so, they channel private capital into high-growth sectors, support job creation, and generate broad economic benefits for the UK.
What are EIS and VCT schemes?
A key challenge for early-stage companies is attracting the risk capital needed to develop products, hire talent, and scale operations. VCTs and EISs are designed to unlock private investment by improving the risk-return profile for investors.
An EIS allows individuals to invest directly in qualifying early-stage companies. Investors receive:
- 30% income tax relief on investments up to £1 million annually (or £2 million for knowledge-intensive companies)
- Capital Gains Tax (CGT) exemption on growth
- Loss relief if the company fails
- CGT deferral on certain reinvested gains
By contrast, VCTs are listed investment vehicles that pool capital and invest in portfolios of small, unlisted UK companies. Investors benefit from:
- 30% income tax relief on annual investments up to £200,000i
- Tax-free dividends
- CGT-free disposal of VCT shares
iTax relief will fall to 20% after 6 April 2026
By offsetting some of the inherent risk, these tax benefits make it more appealing for investors to back early-stage businesses that would find it difficult to raise capital through traditional routes.
The capital raised through VCT and EIS schemes is disproportionately directed toward industries at the forefront of technological progress, including life sciences and medical technology, financial technology and digital infrastructure, software, artificial intelligence (AI), cloud-based services, clean energy and environmental innovation, and advanced manufacturing and robotics. These industries attract strong interest from strategic acquirers – including NVIDIA in cloud-based services, Tesla in robotics, and Google in AI – positioning companies as highly attractive investment targets.
Because these industries rely on lengthy R&D periods and significant early expenditure, they are typically underserved by standard commercial lending. By supporting such industries, VCTs and EISs help position the UK as a leader in global innovation.
Tax treatment is subject to change and depends on individual circumstances. Tax year 2025/26.
How can EIS and VCT schemes support business growth?
Early-stage companies often face a steep funding gap between developing an idea and earning meaningful revenue – a phase often referred to as the “valley of death”. VCT and EIS capital help companies bridge this gap by financing prototype development, clinical trials, laboratory work, software engineering, product design, intellectual property protection, regulatory approvals, market testing and early commercial rollout. Without such funding, many promising ideas would never progress beyond the conceptual stage.
Innovation alone does not create economic growth; it must be commercialised at scale. VCT and EIS-supported companies use capital to transition from R&D to market delivery. This includes hiring sales and marketing teams, expanding operations, building supply chains, and scaling production. As companies grow, they create broader economic spillovers by introducing new technologies to the wider market and driving productivity improvements across sectors.
The EIS programme offers enhanced allowances for knowledge-intensive companies, recognising the critical role that research-driven businesses play in shaping the UK’s economic future. These firms, that are often in fields such as genomics, AI and semiconductor design, frequently sit at the frontier of innovation and rely heavily on early risk capital to compete internationally. Supporting knowledge-intensive companies helps the UK maintain global competitiveness in strategically important sectors.
How can EIS and VCT schemes drive job creation and regional economic development?
VCT and EIS-backed businesses grow faster than the average SME and tend to create highly skilled, well-paid jobs. Foresight Group, one of the most active investors in the VCT and EIS market, reported that businesses across its portfolio have created over 200 new roles, bringing total job creation to more than 3,000. As successful companies scale, they also generate employment in management, operations, customer support, and sales – creating a multiplier effect.
Although London remains a major hub for investment, VCT and EIS funding is increasingly supporting businesses across the UK. By directing investment to regions outside of London, these schemes help reduce structural inequalities and support the government’s levelling-up agenda. Regional innovation clusters also attract highly skilled workers, strengthen local supply chains and create virtuous cycles of economic activity.
Access to early-stage capital encourages entrepreneurial behaviour by reducing the barriers to launching new ventures. Entrepreneurs are more willing to take risks when funding is accessible and when they see a dynamic start-up ecosystem supported by VCT and EIS investments. In turn, successful founders often reinvest their knowledge and capital into new businesses, enriching the wider innovation landscape.
Conclusion
VCT and EIS schemes play a vital role in the UK’s economic strategy by addressing a fundamental market gap: the scarcity of risk capital for early-stage companies. By offering targeted tax incentives, these schemes encourage private investors to back entrepreneurs and innovators who are developing the technologies, products and services of the future. This creates a robust framework for channelling capital into high-growth sectors, accelerating innovation, creating jobs and strengthening regional and national competitiveness.
In an economy increasingly dependent on technological progress and global influence, the importance of early-stage investment cannot be overstated. VCT and EIS schemes not only bridge the funding gap for promising businesses, but also help build a resilient, diversified and forward-looking economic landscape for the UK.
About Anastasia Sagaidachna
Anastasia joined Foresight in 2022 and is responsible for sourcing and executing investments for the Foresight Technology and Ventures Funds, as well as working with existing portfolio companies.
Prior to this, Anastasia worked at the Private Equity arm of EBRD focusing on technology enabled and generalist mid-market investments. Before that, she worked at a lower mid-market private equity fund focusing on enterprise software and generalist investments.
Anastasia holds a BA in Business Administration from the University of Economics in Prague and MSc in Corporate Finance from Bayes (former Cass) Business School.
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