This year’s Budget presents opportunities and challenges for the private capital market. Support for founders and growing businesses could strengthen the investment pipeline, where private equity (PE) firms can support and accelerate growth. However, higher employment costs, tax costs and increased compliance obligations will put pressure on profitability and investor returns. This will particularly be felt in industries with large headcount and already squeezed margins. Successful investors will manage these pressures while helping businesses benefit from innovation.

For private capital, the Budget provides welcome tax certainty and continued support for investment. But this comes against a backdrop of rising portfolio company costs that could place further pressure on earnings before interest, tax, depreciation and amortisation (EBITDA) and value-creation plans. Higher taxation of savings and property income may also increase pressure to deliver attractive investor returns. At the same time, an increasing focus on tax compliance, oversight and digitalisation will create further challenges for PE-backed businesses. This reinforces the importance of proactive tax management throughout the investment lifecycle.

Corporation tax and capital allowances

The main corporation tax rate will remain at 25% and full expensing will be maintained. Full expensing will be retained and the first-year allowance for other main pool assets will increase from 40% to 50% from January 2027. However, from April the main pool writing down allowance will fall from 14% to 12%.

National living wage

This will increase by 3.9% to £13.21 per hour from April 2027, with increases also applying to national minimum wage rates. This will put continued pressure on employment costs and EBITDA for businesses with a large pool of employees.

Savings and property income

Savings and property income tax rates will rise to 24%, 44% and 49% from 6 April 2027. Investors should review the impact on interest returns and available treaty or withholding tax relief. For debt fund managers, the 49% rate may drive renewed attention to fee-waiver and genuine co-investment planning to improve after-tax outcomes.

Corporation tax simplification

A new consultation covers financing, international activity and tax administration. This includes treaty relief on overseas interest, which could simplify cross-border financing for PE-backed groups.

VAT e-invoicing

Mandatory VAT e-invoicing will apply from 1 April 2029, with detailed policy and technical requirements due by April 2028.

Distributions and repayments of capital

We welcome the continued capital treatment for genuine fund investment returns and co-investment, supporting the competitiveness of the UK private capital sector.

Carried interest

No further changes were announced to the carried interest regime, providing certainty following the move to the deemed trading income regime from 6 April 2026.

The Budget strengthens support for founder-led, high-growth businesses through the new £10m founders’ relief and no increase to capital gains tax rates. Much will depend on the detail. But this could expand the pool of innovative UK businesses seeking investment and support stronger PE and venture capital (VC) deal flow. Changes to company share option plan (CSOP) may also help some PE-backed companies offer management teams simpler and more meaningful tax-advantaged incentives.

Founders’ relief

From 6 April 2027, qualifying founders and early investors of high-growth, innovative companies will benefit from a 10% capital gains tax (CGT) rate. It will apply to up to £10m of lifetime gains. This could materially improve founder exit results. However, the detailed conditions, including how the relief applies following PE or VC investment, will be critical when structuring investment, rollover and exit arrangements.

CGT and business asset disposal relief (BADR)

Headline CGT rates remain unchanged, providing certainty for exits, but the BADR lifetime limit falls from £1m to £500k from 6 April 2027. This could widen tax differences between qualifying founders and other management shareholders on the same transaction, making management equity and rollover modelling increasingly important.

Enterprise management incentives 2 (EMI) and management incentives

From 6 April 2027, a revamped company share ownership plan scheme, relabelled EMI2, will provide a £120k individual option limit. It will also offer a 15-year exercise period and a separate limit from existing EMI options. The changes broaden the tax-advantaged incentive toolkit, although PE-backed companies must establish how far the regime remains available following institutional investment before revisiting management equity plans.

International investment

Proposed relief from double taxation for UK investors in US LLCs and similar entities from early 2028. This should reduce a longstanding tax friction around US investment. For PE and VC, this could make it easier for UK founders and investors to back and scale across the Atlantic. Detailed rules are still to follow.

The Budget targets investment in AI, defence, energy, infrastructure and life sciences, alongside regional growth. Further backing for British businesses could attract capital into funds, increase deployment and help portfolio companies scale through additional demand.

Increasing capital for deployment

The Mansion House Accord could unlock around £25bn for UK private markets. The government will also provide additional funding to the National Wealth Fund and British Business Bank. This may support fundraising and increase capital available for PE and VC investment.

Backing regional growth

A further £1bn will support regional innovation clusters. Private capital investors should consider where local funding, skills and infrastructure could strengthen businesses outside established investment hubs.

Supporting strategic sectors

Investment will target defence, energy, infrastructure and life sciences. Government funding and procurement could create demand, support growth and strengthen the investment case for businesses serving these markets.

Reducing industrial energy costs

The British Industrial Competitiveness Scheme will give 10k energy-intensive manufacturers a 20% to 25% electricity discount from April 2027. This could improve margins and support further investment in affected portfolio companies.

Together, these measures could increase the capital available for investment and create new opportunities for funds and portfolio companies across priority sectors and regions.

To discuss what the Budget means for your investments or portfolio companies, contact our private equity team.