Budget 2025: the key tax measures supporting science and innovation

This article is part of our Biotech Review of the Year - Issue 13 publication.

On 26 November 2025, Rachel Reeves delivered her long-awaited second Budget. In addition to raising an additional £26bn in tax revenue by 2030/31, Reeves also included several references to the UK’s Modern Industrial Strategy. 

First published in June 2025, this strategy sets out the UK Government’s 10-year plan to increase business investment and grow the strategically important industries in the UK, including a package of reforms and investment intended to make the UK one of the world’s top three life sciences economies.

This was further developed in July 2025 when the UK Government published its Life Sciences Sector Plan, with a focus on:

1. enabling world-class R&D;
2. making the UK an outstanding place in which to start, grow, scale, and invest; and
3. driving health innovation and NHS reform.

Against this backdrop, this article highlights the tax measures in the 2025 Budget intended to drive growth. It considers how these measures support the Modern Industrial Strategy and how they will impact on the life sciences sector in particular.

1. R&D tax relief advance clearances

The availability of R&D tax relief has historically been pivotal in boosting the UK’s life sciences sector. However, the regime has been the subject of significant change in recent years. The extent of this change, together with the large number of HMRC enquiries and a substantial backlog in claims, has created serious challenges for UK biotechs. 

HMRC currently offers a limited voluntary advance assurance scheme. This gives certain first-time R&D relief claimants the chance to send HMRC details of R&D work before claiming tax relief via a Company Tax Return. However, HMRC’s research has shown that only a small proportion of companies actually use this service. This has been partly attributed to the eligibility criteria for the scheme being too restrictive and the process being inflexible, with long turnaround times.

The Budget included an announcement that HMRC plans to pilot a new targeted R&D advance assurance service in Spring 2026. This pilot is intended to offer companies an accessible and focused assurance process providing certainty in relation to complex or high-risk aspects of tax relief claims.

Unlike the current advance assurance scheme (which is only available to first-time claimants), any SME planning to claim R&D relief will be able to apply to take part in the pilot.

The pilot will offer assurance on four issues:

1. whether a project meets the definition of ‘R&D’ for tax purposes;
2. whether overseas expenditure qualifies for relief;
3. which party is able to claim relief for contracted-out expenditure; and
4. whether a company qualifies for an exemption from the PAYE/NICs cap.

In last year’s Biotech Review, we highlighted the challenges of the changes to the R&D regime in relation to points 2 and 3 above. We anticipate that this pilot may prove particularly helpful to companies still getting to grips with these changes.

In a sign of their commitment to driving improvement in the R&D tax relief landscape, HMRC’s consultation response also sets out that a “Research and Development Expert Advisory Panel” has already been assembled. This panel brings together independent experts in subjects such as AI, life sciences and advanced manufacturing, and will provide both guidance and insight into cutting-edge R&D across specific sectors. The panel’s work is intended to develop HMRC’s understanding of innovation and development in specific sectors so it can better engage with businesses.

2. EMI options

The Enterprise Management Incentive (EMI) scheme is a tax-advantaged employee share option scheme. EMI offers qualifying companies the ability to provide highly tax efficient share-based remuneration to employees. 

In order to qualify to grant EMI options, companies must meet certain strict qualifying criteria. The application of these limits currently means that companies can out-grow EMI very quickly, blocking them from offering this attractive form of incentive to their employees. This is a particular challenge for biotechs in their growth phase competing with large US salaries and reward packages for an often globally mobile and highly skilled workforce. 

In a welcome development, the Budget included an announcement that from April 2026, certain limits will be increased as shown in the table, meaning that a far greater proportion of growth companies will become eligible to grant EMI options and will be able to incorporate this form of employee equity award into their remuneration strategy for a longer period of time.

The time limit for exercising EMI options will be increased from the current maximum of 10 years to 15 years and existing EMI contracts can be amended without losing the tax advantages, provided any amendments are in line with the updated EMI legislation.

Each of these changes should be good news for growth companies in the life sciences sector who typically need significant funding and a longer timeline to exit, helping them to recruit and retain talent in a highly competitive environment. 

3. EIS and VCT scheme changes

The Enterprise Investment Scheme (EIS) and the Venture Capital Trust (VCT) scheme are both forms of tax-advantaged venture capital investment schemes. 

• The EIS helps businesses raise money by offering tax reliefs to individual investors who subscribe for new shares in qualifying companies.
• The VCT scheme provides income tax relief for individuals who invest in a quoted vehicle which in turn invests in the debt and equity of a spread of unquoted smaller companies.

A number of conditions apply under each scheme before the generous EIS and VCT tax reliefs can be obtained. The Budget materially increased (broadly doubling) a number of limits that apply under the schemes, significantly expanding the scope of companies that can qualify to raise EIS and VCT finance and increasing the amount that can be raised, as shown in the table below:

Whilst the above is very welcome news for UK biotech companies who have historically rapidly run out of headroom to raise finance under the EIS and VCT regimes, this good news must be weighed against a reduction in the amount of income tax relief available to VCT investors. This is being cut from 30% to 20% in order to better balance the amount of upfront tax relief offered by the VCT scheme compared to EIS, where dividend relief is not available. 

The UK Government has predicted that the changes to venture capital reliefs should lead to around £100m per year of extra investment into the most successful UK scaling companies. However, when the amount of VCT income tax relief was previously reduced in 2006/07, the level of VCT investment dropped markedly. It therefore remains to be seen how investors will respond to the overall package of changes to these schemes.

4. Tax Support for Entrepreneurs: Call for Evidence

Worth around £9bn in 2025, the UK’s venture capital market is one of the top three in the world, alongside the US and China. Although the UK’s ecosystem is comparatively strong, the Treasury has acknowledged that the UK’s finance and tax systems can sometimes result in businesses feeling constrained as they seek to scale up in order to realise their full potential. 

Building on the other measures we discuss in this article, the UK Government issued a Call for Evidence in late 2025 seeking views on how the tax system could better support growing businesses. The consultation closed on 28 February 2026, and the responses are now under consideration. The intention is that this feedback will drive development of ideas to use the tax system to improve, rebalance and better target support for businesses in their scale-up phase.

Final thoughts

As highlighted by the BioIndustry Association, outdated limits on venture investment tax incentives and EMI share options were widely viewed as holding back the scale-up of life science companies in the UK, so the extension of these limits is very positive news for the sector. 

However, with many companies still grappling with the myriad of changes to R&D tax relief and the significant additional NICs costs imposed in the previous Budget, and with no mention of Business Rates reform to help cushion the rising costs of laboratory space, it remains to be seen whether the Chancellor has done enough to build a tax system to support the UK’s position as a leading life sciences economy.

If you would like further information in relation to any of these measures, please contact a member of our tax team.