UK government faces backlash over capital gains tax changes for tech sector

In a recent blog post, the Startup Coalition, a major tech lobby group in the UK, expressed concern about the potential repercussions of the government’s new tax policies, suggesting they could lead to a significant “brain drain” in the tech sector . The comments come in light of the announcement made by Britain’s Labor government on Wednesday to increase capital gains tax (CGT) rates on share sales, a move intended to strengthen public finances and stimulate economic growth.

Finance Minister Rachel Reeves set out the proposed changes in her inaugural budget, saying the minimum rate of CGT will rise from 10% to 18%, while the maximum rate will rise from 20% to 24%. This adjustment is expected to generate around £2.5 billion for the Government. Reeves highlighted the need to encourage entrepreneurship and wealth creation while ensuring sufficient funding for public services.

Reeves confirmed that the £1 million lifetime limit on tax-free profits through the Entrepreneur Relief Scheme will remain intact, alleviating some fears among business owners about the potential removal of such incentives. However, it has announced that the CGT rate for entrepreneurs using this relief when selling their businesses will increase to 14% in 2025 and 18% by 2026, which some entrepreneurs see as a significant concern.

In addition to the changes to capital gains tax, Reeves revealed plans to increase the National Insurance (NI) rate for employers from 13.8% on earnings over £9,100 to 15% on salaries over £ 5,000. These measures are part of a wider strategy by the newly elected Labor government to close a substantial funding gap in the public finances.

Following speculation about potential tax increases, the tech community has expressed concern about the implications for innovation and talent retention. The Startup Coalition conducted a survey of 713 tech founders and investors, revealing that 89% would consider moving themselves or their businesses overseas, while 72% have already explored such options. The survey also indicated that 94% of respondents would consider starting future business ventures outside the UK if CGT rates were to rise.

Dom Hallas, executive director of the Startup Coalition, acknowledged the survey findings but noted that while the outlook is worrying, he believes founders are unlikely to abandon the UK at the first sign of trouble. Hallas commented that the government has shown a willingness to listen to the concerns of entrepreneurs, particularly regarding crucial investments in research and development.

Barney Hussey-Yeo, co-founder and CEO of financial technology app Cleo, highlighted the growing trend of founders considering relocation, particularly to tech hubs like Silicon Valley. While he expressed some satisfaction with the budget announcement, he noted that many in the industry remain cautious and are contemplating potential moves abroad.

Paul Taylor, chief executive of fintech company Thought Machine, highlighted the financial burden that increasing NI contributions would place on his company, estimating an additional £800,000 in wage costs. This increase could put a strain on resources for companies heavily dependent on investor funding, especially in a period of increased cost pressure.

There is growing demand among tech entrepreneurs and investors for the Government to refocus its efforts on promoting growth and innovation, in line with pledges made during Labour’s election campaign. Phil Kwok, co-founder of e-learning startup EasyA, highlighted that early-stage companies in the UK face difficulties in securing funding and a higher CGT could dissuade investors from taking risks in the market.

Hannah Seal, partner at Index Ventures, urged the government to implement reforms that facilitate employee ownership and prioritize innovation. He stressed that cultivating a startup-friendly environment is essential to maintaining the UK’s competitive advantage in the global market.

Edgar Randall, CEO of Dun & Bradstreet, highlighted the importance of considering the cumulative impact of various policies on economic growth. He cautioned that entrepreneurs evaluate the broader ecosystem when making business decisions, rather than focusing solely on tax policies.

As the UK government navigates these complex tax changes, the tech sector remains vigilant, concerned about the potential long-term effects on innovation, investment and talent retention. The balance between generating public revenue and promoting an environment conducive to entrepreneurship will be crucial in determining the future landscape of the UK tech industry.