As UK businesses look for signs of hope in a challenging economic climate, the 2025 budget arrived with plenty of drama, including the Office for Budget Responsibility accidentally publishing its analysis before the Chancellor had even begun speaking. We’re breaking down the measures that matter most for app developers, digital health innovators, internet of things (IoT) companies, and growing tech startups.

Behind the budget

Budgets are one of the main ways governments set the tone for innovation, combining tax, spending, and regulatory decisions that can either lower barriers for new entrants or reinforce advantages for larger incumbents. Smaller tech firms feel compliance and cost pressures more sharply than big players, but they also depend on public investment in areas like digital infrastructure, AI capacity, and growth capital.

This year’s package touches AI infrastructure, access to capital, market access, and public procurement, alongside broader pressures on costs and runway. Taken together, these choices offer a useful snapshot of how the UK aims to balance regulation and support for innovation, especially for small tech innovators.

Digital infrastructure and AI capacity

New AI growth zones in the North East, North Wales, and South Wales will join existing clusters in Oxfordshire and Newcastle, supported by planning and energy reforms to speed up AI infrastructure build-out. Regional AI clusters are good news for startups, which will be able to access much-needed infrastructure and support. The location of these clusters should help small businesses and consumers across the UK, not just in London, experience the benefits of AI.

Research-heavy startups and academic spin-offs also received good news, as the Chancellor announced that government R&D investment will rise to £22.6 billion by 2029–30. This includes increased funding via Innovate UK’s £130 million Growth Catalyst programme, £500 million for the R&D Missions Accelerator, new Enterprise Fellowships, and entrepreneurship-focused doctoral schemes. Together, these measures strengthen the pipeline from research to commercialisation for small tech companies.

Access to capital

Share options remain essential for SMEs competing for specialist talent. The announced expansion of the Enterprise Management Incentives (EMI) scheme gives founders more room to attract and retain the skills they need, with increasing eligibility thresholds so scaling companies can continue offering EMI options as they grow.

Closing the UK ‘scaleup gap’ has been a long-running challenge. The changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) announced in the budget are practical steps towards making later-stage capital more accessible. With higher limits, investors will be able to support companies as they move beyond the early stage.

The British Business Bank will also deploy at least £5 billion into growth-stage funds and scaleup companies as part of its new five-year strategy, adding much needed domestic capital for innovative SMEs. For founders, this combination of measures could make it easier to raise capital and retain key team members during the next phase of growth.

Market access

Successful startups don’t only need funding, but they also need markets to sell into. The government is a huge potential customer, provided procurement rules allow and encourage contracting with small businesses. The budget announced some steps in the right direction, including the appointment of procurement innovation champions in each department and the creation of an innovation marketplace.

The government also announced £300 million for NHS technology modernisation. This means that digital health startups could see new opportunities as major parts of the NHS upgrade their tech stack, and look for tools that improve efficiency, patient outcomes, and data security. If implemented well, these measures could help small tech firms win more public-sector work.

Broader economic pressures

Against the positive innovation measures, there are challenges related to slow growth, higher taxation, and increases to business costs that will be felt most by smaller businesses. These challenges include:

  • Slower growth than anticipated, with GDP forecasts reduced to 1.4 per cent for 2026.
  • £26.1 billion in tax rises via frozen tax thresholds (‘fiscal drag’).
  • Higher minimum wages increasing hiring costs for businesses.
  • Dividend and savings tax increases for founders who rely on that income.
  • Reduced capital gains relief on employee ownership trust sales; and
  • Salary-sacrifice pension contributions facing National Insurance above £2,000 from 2029, increasing costs to employers.

For many early-stage tech firms, this combination means tighter margins, less flexibility in how founders pay themselves and their teams, and a greater need for careful financial planning alongside any growth ambitions.

Final word

The 2025 budget sends mixed signals for small tech. On the one hand, long-term commitments to digital infrastructure, AI capacity, and growth-stage capital point in the right direction for innovators who need reliable networks and investment to grow. On the other, higher taxes, rising employment costs, and tighter household finances will make it harder for early-stage teams to manage cash flow and plan with confidence.

For app developers, digital health companies, and IoT startups, the question is whether these measures add up to an environment where regulation and investment work together. If rules remain complex and fiscal pressures continue to build, the advantages will sit with larger firms that can absorb compliance and costs. If implementation focuses on proportionate requirements and practical support, small tech can turn the budget’s commitments into real products, jobs, and exports.

The Treasury’s Call for Evidence on Tax Support for Entrepreneurs, running until 28 February 2026, is a key test of that balance. It covers EMI, EIS, VCTs, founder incentives, and scale-up support – all areas that directly affect how small tech companies raise capital and reward their teams. ACT | The App Association will be gathering input from members and submitting a sector-specific response to ensure the small tech perspective is reflected. Founders who want to share their experience and priorities can contact Stephen Tulip here.