The newly elected UK Labour government’s first budget arrived Wednesday with big tax and spending rises, and includes little to impress the country’s private markets.
Finance minister Rachel Reeves promoted her debut Autumn budget as addressing economic stability and the needs of working people. The plan includes £40 billion ($51.9 billion) in tax increases designed to help right the UK’s finances. Many investors remain concerned it will damage the future of the UK’s private markets.
“Today’s Budget offered the Chancellor a chance to outline a tax approach that nurtures entrepreneurship, encourages investment and innovation, and fuels long-term economic growth,” said David Ovens, joint managing partner of Archangels. “Instead, we have seen a raft of measures [...] all of which will undermine the country’s attractiveness as a place to start and scale a business.”
The biggest tax increase comes in the form of employers’ national insurance contributions—a tax paid by businesses for each employee—which will be raised from 13.8% to 15% beginning in April.
The change will raise an additional £25 billion for the UK’s coffers but Ekaterina Almasque, general partner at early-stage investor OpenOcean, warned that it will increase the cost of day-to-day operations for startups—a move made worse by the challenging funding environment.
Capital gains clashes
The capital gains tax—the charge applied to the gain from the sale of assets such as shares—is also set to rise from 10% to 18% for the lower rate and 20% to 24% for the higher band. This too, investors warn, may cause some founders to rethink the UK as a location to build a business or sell their businesses ahead of the hike.
“Tax regimes have a direct impact on where future founders choose to build their companies for two reasons: their personal futures, as well as how this could impact their ability to hire global talent,” Blossom Capital general partner Imran Ghory said. “Long-term share options are a meaningful part of compensation and raising capital gains tax will detrimentally impact this for a new generation of entrepreneurs and operators.”
But it is the tax of carried interest that the private markets feared the most in the run-up to the budget announcement. Speculation had the capital gains rate for private equity profits increase to 45%, up from 28% currently, sparking talk of brain drain and capital flight from the UK.
Reeves was less aggressive than many feared, raising the tax to 32% and acknowledging the “vital contribution” fund managers make to the economy. FTI Consulting managing director Lewin Higgins-Green called the move “a helpful compromise,” balancing the need to remain internationally competitive and raise revenue.
But Higgins-Green warned that the tax rise is not the end of the story, as the entire carried interest regime is set to change in 2026 when it is moved from capital gains tax to income tax and made subject to national insurance contributions.
Finally, Reeves announced that the lifetime limit for Business Asset Disposal Relief—a capital gains tax relief on the sale of certain company assets—will remain at £1 million. However, the rate of business asset disposal relief will rise from 10% this year to 14% in April.
Beyond tax
Outside of the major tax news, VC investors welcomed Reeves’ commitments to R&D and the need for more private investment in areas such as AI and climate.
“The commitment to investment through the National Wealth Fund and the protection of the research budget aligns with our belief that investment in technology will ultimately lead to long-term growth,” Anne Glover, CEO of Amadeus Capital Partners, said. “If the government is serious about driving such investment in the UK, it should also look at encouraging or mandating that pension funds diversity their stakes into riskier assets such as venture and growth capital.
The finance minister previously announced a review earlier this year with a view to getting more pension assets into the private markets. She is also considering a Canadian-style pension model, which would see a consolidation of pension schemes into larger funds to drive investment in productive assets such as infrastructure and high-growth businesses.
While the budget was certainly headline-worthy, some are still waiting to see how the new government is going to encourage growth.
“As an investor, I would now like to see the focus shift away from tweaking the tax system to really fundamentally how we drive growth,” Cherry Freeman, founder and general partner of Hiro Capital, said. “We talk about entrepreneurship, but we also need money, we need investment [...]. If the UK government wants to enable growth, then we have to ensure the foundations are there to encourage entrepreneurs and encourage capital so the UK can remain a global centre of innovation.”
Chancellor of the Exchequer Rachel Reeves poses with the red Budget Box as she leaves 11 Downing Street to present the government’s annual budget to Parliament on Oct. 30 in London, England.
Featured image by Leon Neal/Getty Images
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