Chancellor Rachel Reeves recently unveiled the most significant tax-raising budget since 1993, highlighting an increase in funding for the National Health Service (NHS) and schools. This budget includes a range of key announcements that are poised to impact tech startups and venture capital in the UK, raising concerns among entrepreneurs and industry leaders alike.
One of the most notable changes is the increase in capital gains tax (CGT), which is levied on the profits made from the sale of assets and shares. For basic rate taxpayers, the CGT rate will rise from 10% to 18%, while those in the higher tax bracket will see an increase from 20% to 24%. This substantial rise in CGT is particularly concerning for startup founders and investors, as it directly affects the profitability of their investments and exits.
Additionally, employer National Insurance contributions will increase from 13.8% to 15%. This rise imposes an additional financial burden on businesses, particularly small and medium-sized enterprises (SMEs), which are often more vulnerable to such increases. This change may lead to companies reassessing their hiring strategies and overall operational costs, potentially stifling growth in the startup sector.
Another significant announcement is the abolition of “non-dom” status, a tax provision that has allowed UK residents whose permanent homes are outside the UK to avoid paying UK taxes on their overseas earnings. The elimination of this status could deter high-net-worth individuals from establishing residence in the UK, further impacting investment in startups.
The budget also proposes an increase in carried interest, a crucial factor for venture capital firms, which will rise to 32% starting in 2025, with further changes expected in 2026. This increase could diminish the attractiveness of venture capital as a career path, potentially leading to a decrease in investment activity within the UK.
Despite these increases, Business Asset Disposal Relief (BADR) will remain at 10% for the current year. However, it is set to rise to 14% in April 2025 and further to 18% by the 2026/27 tax year. While some entrepreneurs may find relief in the current BADR rate, the planned increases signal a growing challenge for those looking to exit their businesses in the future.
On a more positive note, the government is maintaining its commitment to £20.4 billion in research and development (R&D) investments for the fiscal year 2025/26, a move that could provide critical support for innovation and technological advancements within the startup ecosystem. Furthermore, a cross-government review will focus on technology adoption for growth, innovation, and productivity, highlighting the government’s recognition of the importance of technology in driving economic progress.
The reactions from industry leaders to the Chancellor’s budget have been mixed, reflecting a deep concern over the potential implications for the entrepreneurial landscape in the UK. Phil Bungey, co-founder and COO of UK wealthtech Prosper, warned that the tax changes could discourage young people from starting new businesses. He emphasized that the most immediate fallout may be the loss of entrepreneurs leading mid to late-stage fintech companies in the UK, as they are the ones who generate significant capital.
Charles McManus, CEO of ClearBank, echoed these sentiments, suggesting that the combination of increased capital gains tax and National Insurance, along with a lowered threshold for National Insurance contributions for businesses, could significantly deter new business formation. He also noted that the current climate could exacerbate the challenges already faced by UK businesses considering listings in other markets.
Dom Hallas, executive director of the Startup Coalition, recognized the challenges posed by increased CGT and BADR. However, he pointed out that the government seemed to have listened to the concerns of entrepreneurs and managed to strike a balance that, while not ideal, avoided the worst-case scenarios that many had feared.
Santosh Sahu, founder and CEO of Charac, welcomed the Chancellor’s support for small businesses and R&D but cautioned that the tax hikes for high-net-worth individuals, who are often pivotal investors in early-stage companies, could lead them to seek more favorable markets outside the UK. This, he warned, could ultimately stifle the flow of essential funding to the UK’s vibrant startup ecosystem.
Russ Shaw, founder of Tech London Advocates and Global Tech Advocates, stressed that the increase in capital gains tax could hinder investment at a time when the UK economy needs it most. He cited evidence from the US indicating that higher capital gains taxes tend to deter startup funding, which could directly contradict the government’s ambitions for economic growth. Shaw emphasized the crucial role of entrepreneurs in maintaining the UK’s global competitiveness and warned that dissuading investment might slow progress and weaken the country’s reputation as a leading innovation hub.
Finally, Philip Salter, founder of The Entrepreneurs Network, noted that entrepreneurs might feel some relief that the CGT rate was not increased as drastically as feared. However, he highlighted that the gradual rise in BADR would continue to make the UK a less attractive place for starting and exiting companies. Many entrepreneurs are already contemplating relocating their businesses, and these tax changes could make such decisions more compelling. Salter referenced a letter signed by 1,250 ambitious entrepreneurs opposing the proposed tax changes, illustrating the growing concern within the entrepreneurial community.
In summary, Chancellor Reeves’ budget has sparked significant debate within the tech startup community, with many industry leaders expressing concern over the potential impacts of increased taxes on investment and entrepreneurship in the UK. As the government navigates the delicate balance of supporting vital sectors while imposing necessary tax increases, the reactions from the startup ecosystem underscore the need for careful consideration of the long-term implications for innovation and economic growth. The upcoming months will be critical in determining how these changes will shape the future landscape for tech startups and venture capital in the UK.