Startup founders have been hit by tax rises and changes to a relief scheme on exit earnings up to £1m, as UK finance minister Rachel Reeves announces her first Budget will raise £40bn in taxes.
After months of rumour and speculation, Reeves confirmed speculation that capital gains tax on the sale of business shares will be rising. So too will employers’ national insurance (NI) contributions.
The rumoured total scrapping of Business Asset Disposal Relief (BADR) — which limits tax on exit takings of up to £1m to 10% — did not happen, but the amount of tax entrepreneurs pay on an exit will increase in the coming years.
The hikes come as the government looks to make up what it says is a £22bn black hole in its finances and pump money into national infrastructure and the NHS.
There were also investment packages announced for what Reeves called sectors with the “biggest growth potential”.
Here’s how the UK Budget could impact startups.
Changes to tax relief on exit earnings
BADR is changing. While Reeves said that the lifetime limit of BADR would remain at £1m, the amount of tax founders pay on those earnings will increase.
From April 2025, entrepreneurs will pay 14% on their first £1m of exit cash. From April 2026, that figure will rise to 18%. Capital gains tax (CGT) on the sale of business shares has sat at 20% without the relief.
It’s not the first time in recent years that tax relief for entrepreneurs has been scaled back. In 2020, then Conservative finance minister — and later prime minister — Rishi Sunak, reduced the threshold for receiving tax relief on sale of shares from £10m to £1m.
Capital gains tax on the sale of business assets increased
The rate of tax paid on the sale of shares will rise from 20% to 24%.
While it’s not the worst case scenario for founders — it was previously reported that the government was considering increasing by as much as 39% — the move will be seen as a blow by many in the tech sector.
Reeves said that raising CGT and increasing the rate of tax founders pay on their first £1m of exit earnings would bring in £2.5bn by 2029.
Employers national insurance contributions hiked
Employers will have to pay an increased rate of 15% of NI contributions for employees — up from 13.8% on earnings above £175 a week — in what is considered the government’s biggest budget move.
The change, along with lowering the threshold employers start paying NI from £9,100 to £5,000, will bring in £25bn per year, said Reeves.
Carried interest tax rises
Reeves said that CGT rates on carried interest will rise from 28% to 32%.
That could be set the rise further from April 2026, with the Treasury saying that “carried interest will be taxed fully within the Income Tax framework,” from that date.
VCs have been anxious about potential rises to the tax they pay on their carried interest since Labour announced it would look to close the “tax loophole” that meant it was taxed at 28% — as opposed to income tax, which is taxed at 40% for earnings over £50k.
Funding for “growth” industries
As part of the government’s Industrial Strategy, Reeves also announced funding packages for sectors with “the biggest growth potential”.
Over the next five years, the government will invest £1bn in the aerospace sector, £2bn in the automotive sector and up to £520m in life sciences.
National Wealth Fund
Reeves said that the government was confirming plans to capitalise the National Wealth Fund to invest in “industries of the future”.
The government will pump £5.8bn into “the National Wealth Fund” — which was rebranded from the UK Infrastructure Bank earlier this year and is an organisation designed to increase investment into key UK sectors. An extra £1.5bn will also be spent on ports, gigafactories, clean steel, carbon capture and green hydrogen.
Despite calls from the tech community, there was no mention of funding for new supercomputer hardware.
GB Energy
GB Energy — a state-owned company to increase renewable energy generation — would get £125m of the £8.3bn previously promised in 2025-26, Reeves said. The company hopes to mobilise £60bn in private capital into the sector.
R&D tax credits
The Treasury has said that the government will commit to maintaining the R&D tax relief scheme — which gives tax rebates on the money companies spend on innovation.
While the scheme is seen as a vital source of relief for many startups, founders previously told Sifted that they were wrongly being asked to pay back tax credits.
Proof of concept funding
The Treasury said it would provide at least £40m in proof-of-concept funding — cash to help spin out university research into commercial propositions — over the next five years.
Read the orginal article: https://sifted.eu/articles/uk-budget-2024-startup-news/
