UK’s Finance Minister, Rachel Reeves, recently announced new fiscal policies at the Labour Party Conference in Liverpool. These plans, which include a significant increase in business taxes, have sparked debates among leaders in the tech industry and venture capitalists about the UK’s ability to become a leading global hub for artificial intelligence.
The new plan involves an increase in Capital Gains Tax (CGT), a levy on the profit earned when an investment is sold. The low CGT rate was raised from 10% to 18%, and the high rate from 20% to 24%. Reeves believes that these changes will generate an additional £2.5 billion ($3.2 billion) for the public coffers.
The government also announced a cap on Business Asset Disposal Relief (BADR), which provides entrepreneurs with a reduced tax rate on capital gains when they sell part or all of a business. The limit for BADR will now be £1 million. The CGT rate applied to entrepreneurs using the BADR scheme will increase to 14% in 2025 and 18% in 2026. Despite these increases, Reeves assures that the UK will still have the lowest CGT rate among European G7 countries.
While the tax increases were less severe than expected, they have raised concerns among tech executives and investors. They fear that the new policy might lead to inflation and slow down recruitment. Also, the government’s decision to increase National Insurance (NI) contributions, a tax on earnings, has added to these concerns. With a predicted revenue of £25 billion per year, the NI increase is the most significant revenue-generating measure in the new policy.
CEO and co-founder of fintech firm Thought Machine, Paul Taylor, expressed worries about the NI rate increase, as it would add £800,000 to his company’s payroll expenses.
The chance of building a company as successful as Nvidia in the UK may also be affected by another tax increase – the tax rate for carried interest, a share of profit a fund manager makes from a private equity investment. The tax rate for carried interest will rise from 28% to 32%. Haakon Overli, co-founder of European venture capital firm Dawn Capital, believes this could deter venture capital investment in the UK.
Despite the concerns, there are some positives. For instance, the UK has committed to mobilizing £70 billion of investment through the recently formed National Wealth Fund. CEO of venture capital firm Amadeus Capital, Anne Glover, sees this as a good move, but urges the government to mandate that pension funds diversify their investments into riskier assets like venture capital.
While these new fiscal changes pose significant challenges, some business leaders are welcoming them for the clarity and certainty they provide. However, others argue that increased costs may impact hiring decisions and call for government support to offset the new burdens. Adam French, a partner at seed-stage investors Antler, believes the impact on the UK tech ecosystem will be minimal. He expresses confidence in the resilience of the UK’s entrepreneurial community.
