The UK government’s plan to position itself as a global technology powerhouse is facing headwinds following Finance Minister Rachel Reeves’ recent budget announcement.
Reeves outlined significant tax increases, including a capital gains tax (CGT) hike and an employer National Insurance (NI) rise, which could make the business environment more challenging for tech companies and investors.
Critics in the tech sector warn that these changes could dampen innovation, inflate operational costs, and impede the growth of Britain’s startup ecosystem.
Capital gains tax increase to impact venture capital investments
Rachel Reeves has proposed an increase in CGT rates, a move projected to generate £2.5 billion annually for public funding.
The changes will see the CGT rate rise from 10% to 18% on lower bands and from 20% to 24% on higher bands, with business asset disposal relief (BADR) rates set to climb to 14% in 2025 and 18% by 2026.
While the government argues that these rates remain competitive compared to other G7 nations, venture capitalists caution that this may discourage the investment needed to drive growth in tech.
Haakon Overli, co-founder of Dawn Capital, expressed concerns that the increased CGT might inhibit the development of a tech ecosystem capable of producing companies with the potential of global giants like Nvidia.
Venture capitalists are also urging the government to implement balanced reforms to encourage high-risk tech investments without stifling innovation.
National Insurance hike could impact hiring and inflation
Along with CGT adjustments, the government’s budget includes a substantial increase in employer NI contributions, set to bring in £25 billion annually.
This increase raises employer NI rates by 1.2 percentage points to 15% by April 2025, creating potential challenges for hiring and payroll expenses within the tech sector.
Small and medium-sized businesses (SMBs), already grappling with rising wages, are particularly concerned about the impact on profitability and expansion plans.
The employer NI threshold will decrease from £9,100 to £5,000, though small businesses will benefit from an employment allowance increase to £10,500.
Economists have also raised alarms over inflationary risks, noting that many businesses may pass these additional costs onto consumers.
Analysts at Goldman Sachs now project core inflation to hit 2.5% by December 2025, potentially complicating the economic outlook.
National Wealth Fund aims to support tech
Despite rising costs, the UK government has introduced measures to boost tech sector investment.
The recently established National Wealth Fund, modeled after sovereign wealth funds, pledges £70 billion toward long-term technology investments.
Industry leaders like Anne Glover of Amadeus Capital view this as a positive step, aligning with ambitions to solidify the UK as a tech hub.
She emphasizes the need for further government support, particularly in encouraging pension funds to invest in high-growth tech firms, which could be vital for sustainable sector expansion.
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