Historically the UK has sought to position itself as a leading hub for venture-backed start-ups, buoyed by tax incentives, comparatively low capital gains tax rates, and schemes aimed at rewarding entrepreneurial risk. This, in tandem with the UK having great universities, the ability to absorb skilled migrants and (relative) social and political stability, has resulted in the UK being an attractive place from which to develop new ideas and take risks. Rachel Reeves was, to a certain extent, listening when the tech sector spoke, and her first budget steered clear of the truly disastrous for the country’s ecosystem. However, as economic pressures mount, the changes remain significant, with implications for both VC funds and the start-ups and founders they support.
Capital Gains Tax (CGT)
Despite the immediate rise to 18% for basic-rate taxpayers and 24% for higher-rate taxpayers, the UK’s CGT rates remain some of the lowest in Western Europe, to the advantage of British start-ups. By comparison, countries like France, Germany and the Nordics impose higher CGT, often exceeding 30%, meaning the UK should remain an attractive place to start and grow a business. It is worth noting that the immediate increase may affect contracts exchanged but not completed before 30 October, as the government seeks to capture transactions rushed through ahead of the budget.
Business Asset Disposal Relief (BADR)
For venture capital-backed start-ups, BADR offers founders a compelling incentive at exit, with the first £1 million of gains previously taxed at just 10%. By increasing the rate to 14% from 6 April 2025 and to 18% from 6 April 2026, the government has been particularly unfriendly to those founders who have ridden the post-Covid wave of virtually closed M&A markets and who had their sights on achieving an exit in the mid-term. As with the CGT changes, careful planning is required for any contracts to be entered into prior to 6 April 2025.
Early-Stage Funding and EIS/SEIS Incentives
Beyond CGT and BADR, the UK has historically provided support through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which offer tax breaks for early-stage investors. Under these schemes, investors receive upfront income tax relief, CGT exemption on disposal after three years, and other benefits. For early-stage VC funds and angel investors, EIS and SEIS are crucial tools in managing investment risk and encouraging capital flow into start-ups. By increasing CGT but leaving EIS and SEIS untouched, the government has solidified its commitment to economic growth through the provision of essential funding to start-ups and addressing funding gaps at very early stages.
Employer’s National Insurance Contributions (NICs)
All UK businesses will be impacted by the rise in NICs from 13.8% to 15% from April 2025 and the lowering of the secondary threshold, but small start-ups and scale-ups will disproportionately suffer the impact of that squeeze whilst operating in an increasingly competitive environment to lure the best talent from both within the UK and from overseas. The granting of share options has historically been a big driver in plugging the pay gap and will continue to have a big part to play, but rising CGT rates inevitably impact the upside despite EMI relief continuing to operate to reduce the impact on gains for employees in those companies which meet the requirements.
Carried Interest Rules
The UK’s competitive carried interest tax regime has been a key factor in attracting talent and VC funds to the UK. In turn, this has boosted deployment of funds into UK based start-ups and scale-ups. Labour’s mission to align the taxation of carried interest with employment income threatened not just to remove the UK’s competitive advantage, but to actively drive funds and talent out of the UK.
Thankfully, intense lobbying from the private equity and VC industry successfully softened the blow in this week’s Budget; carried interest will be taxed at a flat rate of CGT 32% from 6 April 2025 and an effective income tax rate of 32.625% (plus Class 4 NICs) from 6 April 2026.
The government will consult on further changes to be introduced from April 2026, with a focus on minimum holding periods and co-investment requirements for qualifying carried interest. The consultation offers an opportunity for further input from industry experts and it is hoped that, while the UK system may be brought more in line with that of other European countries, further changes will not deter fund managers and investors from basing their funds in the UK.
Strategic Considerations
Maintaining a flexible approach and proactive financial planning will be key as the market adjusts to these changes in the tax landscape. VC funds and start-ups will need to adjust their strategies - especially for companies nearing a viable exit – and we recommend that founders seek advice on tax planning early in their company’s lifecycle.
If you are a founder or investor and would like to discuss how any of these developments might impact you, please get in touch with Janine Suttie, Graham Spitz or Helen Cox.
