A grim morning today for all the rich folks with their non-Dom status rescinded, who send their kids to private school and fly around the world on private jets.
Yesterday Rachel Reeves delivered her maiden budget with an impressive performance, Labour's first for fourteen years. In a wide-ranging brief, she focused less on economic growth and more on financial stability, unveiling big tax changes and a new approach to government borrowing.
There was little on growth despite the Labour mantra, instead a focus on public services and infrastructure investment, the tax increases giving her the housekeeping resources to make good the funding blackhole inherited. For me, it was a short term set of fixes to set the foundations for future growth. I think she took most folk with her on her choices.
In her Everyday Economy document published in 2018, she set out her economic philosophy , so we shouldn’t be surprised about her priorities:
People want security and they want prosperity: they want good work and a decent wage; parents want their children to have an education that will give them the opportunities to get on in life; and voters want a government they trust will benefit both their own family and the country.
I expect that like myself, most reading this blog can take care of the fundamentals for themselves and their families. We all have ambitions for improving our standard of living, but we all surely recognise our society is broken as a result of the choices made by the previous Government, and that priorities are to tackle homelessness, education, the need for foodbanks, social inequality and health as the bedrock for a fairer society.
So, just press pause for a moment. Don’t us business folk over-egg the impact of tax incentives, NIC increases and changes to CGT and IHT rules as the things that matter most in life? No founder launched their startup venture because of tax rules. It’ s because we’re thinking too much about ourselves and not enough about the bigger picture. If you pay CGT, you are wealthier than most.
Phew. Got that off my chest. Here are some of the changes to UK fiscal policy from yesterday’s budget, and thoughts on the impact on the startup economy:
The plan is to raise £40bn in taxes, making the budget one of the largest tax-raising events in history.
Employer NIC will rise from 13.8% to 15%, with payments starting at £5,000 salary instead of £9,100.
The national living wage is set to increase to £12.21 per hour for those over 21, while for 18–20-year-olds will rise to £10.
Both CGT rates will increase, from 10% to 18% for basic rate, and 20% to 24% for higher rate.
The IHT threshold freeze is extended to 2030, maintaining the current £325,000 tax-free allowance and seven-year rule on gifting and tapering relief, whilst inherited pension pots will be subject to IHT from April 2027.
The non-Dom tax regime will be abolished from April 2025, replaced by a new ‘residence-based scheme’
So what does this mean for those industrious bootstrapping founders?
A budget for growth?
There was very little for individual startup founders in the budget. The OBR, the UK's official independent forecaster's verdict is that the Budget will not give a jump-start boost to the economy in the next three to five years - in the short-term the impact on GDP stimulus is minimal and will possibly hit private investment.
Business bore the brunt of the Chancellor's £40bn tax raising but small businesses may be spared the worst of the impact. However, the 1.2% increase in employers’ NIC is expected to raise £25bn of the £40bn target, will probably fall as a burden on business.
Public Sector
The public sector got a significant boost, as was to be expected. There were repeated references to adoption of technology to improve efficiency and stakeholder outcomes, so that is an opportunity for innovative startups. The strategy is to focus on long-term infrastructure investment and reforms to stimulate growth over the next ten years.
Taking a longer-term perspective is, in my view, the responsibility of proper Government, not seeking short-term injections of populist stimulus that have no sustained impact. The short-term ‘fix for stability’ and long-term ‘investment for growth’ seems to offer two conclusions: it’s a gamble, a small return for such a big budget today, and needs patience to see if the philosophy and strategy will work.
The spending bump of £70bn a year is 2% of UK GDP and brings us back closer to European levels of spending. This is jointly funded by the tax rises and a redefinition of borrowing to leverage debt. At least there is a focus on balancing the books.
Fiscal finger pointing
It was also a ‘budget of blame’. Rachel Reeves looked like Inspector Kate Fleming (actress Vicky McClure) in Line of Duty laying a charge sheet against former Treasury ministers for crimes against spending forecasts. The repetition of this £22bn ‘black hole’ looks like Labour’s version of the infamous ‘there is no money left’ letter.
With this budget the Chancellor attempted to wipe the slate clean on the fiscal fiction of the previous Government, and the necessity of tax rises to fund her growth agenda. A line can be drawn under the years of austerity. The gamble here is that the economy is robust enough to deal with it.
It was like a new CFO joining a startup and seeing the underlying financial position of the venture. You’re not there to win a popularity contest, you’re there to create the conditions for growth. Sunak accused the Chancellor of ’fiscal fiddling’ and theatrically listed the host of tax increases as his own MPs shouted gleefully ‘UP!’, but what were her options after fourteen years of Tory malaise?
National Insurance
This one caught the headlines and drew widespread criticism. Employers' NIC will rise from 13.8% to 15%, and the threshold at which they have to pay it will fall from £9,100 to £5,000. But there's some relief for employers in that employment allowance - which allows companies to reduce their NI liability - will increase from £5,000 to £10,500.
Business owners could face having to pay an additional £615 per employee, and this could potentially push some businesses to cut wages. Let’s be honest, it’s a tenner a week, but the cost will either be met out of profits (unlikely), increasing prices (possible) or decreasing future salary increases for employees and slowing down hiring (possible).
Contrasting this criticism, did businesses hand out bumper pay rises when corporation tax was cut? As Marx pointed out in Economic and Philosophical Manuscripts (1st Manuscript: Wages of Labour), wages are determined by the fierce struggle between capitalist and worker, so nothing has changed.
Tax breaks for founders exiting their business
Many advisors sounded alarm over the CGT increases and the easing of Business Asset Disposal Relief, which enables business owners to retain more profit from the sale of their business. The budget maintained the lifetime limit for BADR at £1m – reduced from £10m by then chancellor Sunak in 2020 - but CGT will rise as highlighted earlier.
With increases in CGT, EIS reinvestment relief is more appealing to defer tax, investment losses could become more valuable as they are offset against asset sales that attract a higher future potential CGT liability. VCTs could also be attractive as there is tax relief on the input of funds, tax free dividends and no CGT on realisation.
The CGT uplift will mean less net-proceeds for founders on exit, but not to the extent that it sends them fleeing overseas – that’s scaremongering, the UK still has the lowest CGT rate of any European G7 economy.
Innovation and R&D
The Government has listened to ensure the entrepreneurs’ biggest fears have not materialised and some balance has been struck including maintaining support for R&D investment. Reeves outlined plans to invest £20bn in the ‘growth industries of the future, including £6bn to protect core research funding for engineering, biotech and medical sciences. The Department of Science, Innovation and Technology’s R&D budget rises by 8.5% in real terms to £13.9Bn.
With increased funding for R&D, a focus on private-public sector collaboration, and a substantial commitment to digital healthcare transformation, the tech sector is poised for growth. Startups that leverage the available resources will be better positioned to succeed.
Summary
The overall economic framework appears more cautionary than the headline grabbing ‘growth’ statements pre-election: tax up, debt up, growth downgraded. It’s like an investor update meeting when your startup hasn’t hit its forecasts and you’re trying to add a dose of realism yet continuing to lean into future optimism. For many startups, particularly those operating on tight cash margins, the increase in NI could prompt a re-evaluation of salary structures, hiring plans and potential pay rises.
However, SEIS and EIS remain and are extended until 2035, give exited business owners the opportunity to invest in innovation and offset or defer CGT liabilities. This creates a positive environment for entrepreneurship. These schemes already offer very generous tax benefits.Does this package of fiscal measures retain an environment in which it is attractive to build and sell a company? I would say so. No entrepreneur or investor is going to like the increases in CGT or the reduction in BADR, but will it slow the rate of start-ups? Not at all. Founders start a business because they have a burning passion, not because they factor in potential tax scenarios ten years down the line. In reality, CGT rates don’t affect the decision to create a startup.
The first female Chancellor in history delivered her first Budget with a challenge, saying To girls and young women everywhere, I say let there be no ceiling on your ambition, your hopes and your dreams; at a personal level, that was stirring, and as motivational as any would-be startup founder would want to hear.
For me, the rhetoric of a disappointing budget is lazy, simply shaped by misplaced ideology and what’s in it for me culture. We must not lose faith in a Government with a focus on building a society for the many not the few, where our collective and individual humanity is our core, not personal financial gain.
Humanity is an ocean. if a few drops of the ocean are dirty, the ocean itself does not become poisoned. A people that values its privileges above its principles soon loses both. There can be no keener revelation of a society's soul than the way in which it treats its children, its ill and those without a home. As entrepreneurs, let’s be innovative and bold and create a better future for everyone with our endeavours, not simply moan about our personal tax liabilities.
Comments