The UK’s new Labour government has released its first budget and has been received to a mixture of praise and cynicism.
Prior to the release of the budget, the Labour government had made claims of a £22bn ‘black hole’ that had been left by the Conservative party. This helped set the tone for the upcoming budget, indicating there was going to include a noticeable rise in taxes. In fact, the budget has raised taxes by £40bn.
The main talking points of the budget
The biggest point to come from Rachel Reeves’ budget is the expectation to raise £40bn through several tax changes.
A major contributing factor to this comes through changes being made to national insurance. Companies will now pay national insurance at 15% on salaries above £5,000, a notable change from 13.8% on salaries above £9,100. This is expected to raise around £25bn for the government.
A small relief is being given to smaller companies through Employment Allowance, which allows qualifying businesses to reduce their national insurance liability to salaries above £10,500.
One other notable aspect of business tax addressed in the budget was a rise in tax for private equity firms. From April, private equity managers will now be taxed 32%, up from 28%, on share of profits from successful deals.
As for personal taxes, income tax band thresholds will rise in tandem with inflation, the inheritance tax threshold freeze was extended by two years and the basic rate capital gains tax on profits from the sale of shares will rise from 10% to 18%, and the higher rate has gone from 20% to 24%.
The changes set out in the budget have split opinions. For instance, Avion Gray, the CEO and co-founder of WealthTech platform Belong, said, “Today marked a momentous occasion with the UK’s first female Chancellor delivering a budget of sensible and restrained measures with the core aim of balancing both the economy’s finances as well as helping to empower those of its businesses, startups and citizens.”
Gray noted that worries over sizable increases to capital gains tax and other personal taxes have been addressed with a pragmatic approach, while freezes to inheritance tax will be welcomed by those looking to start their personal investment and finance journeys.
As for businesses, Gray is confident about the establishment of Skills England, a body the Labour government hopes will upskill workers and drive economic growth. She said, “In summary, where previously there had been a deep sense of uncertainty and hopelessness surrounding today’s budget, the Chancellor has delivered a reassuring wave of measures that put the UK on a path to recovery and future growth for all walks of life.”
On the other end of the spectrum, Theo Chatha, Chief Financial Officer of invoice factoring business Bibby Financial Services, said, “The new government came into power on a mandate set to support SMEs. But this budget fails to provide them with the support they need to succeed – and will even harm their growth. “
He noted that while the Employment Allowance acknowledged the needs of smaller businesses, Chatha believes the increase in employer national insurance payments poses a notable risk to SMEs. “Many are already struggling with high costs and thin margins, so making employment more expensive could result in an immediate cashflow crisis. As a knock-on effect, we could see investment levels, growth ambitions and job creation all damaged as a result.”
Additionally, Chatha sees the rise in capital gains tax discouraging the entrepreneurial spirit in the UK. The consequences of this are already happening, he claimed. “According to official figures, more than 1,600 company directors have closed their businesses’ doors since the start of October – by far the highest number of closures this year and more than double the amount for the whole of last October.”
Ultimately, Chatha feels the Labour government has not made good on its promises to SMEs and moving forward urges them to not only recognize their importance to the economy but also their fragility. “For many SMEs, just a few unexpected or high costs disrupt a precious balance and throw their future into doubt.”
With the mission of plugging the ‘black hole’, the government has tried to protect the working people, while wealthier individuals have felt the brunt of the damage. But Janet Bastiman, Chief Data Scientist on financial crime at AML platform Napier AI, believes there could have been another way to raise funds.
She said, “Government suggestions are focused on the quicker fix of increasing National Insurance contributions from employers in the UK. We could instead focus on the longer term at recovering funds from the shadow economy and back into the wallets of honest earners, and subsequently, public funds.”
A recent report from Napier AI found that in 2023, the UK lost £138bn from gross domestic product (GDP) to the shadow economy through money laundering. This figure is expected to grow annually. The UK is falling behind other governments in their ability to curb the funds lost to the shadow economy, with losses amounting to 5.39% of the country’s GDP, compared with the US, which only lost 2.52% of its GDP, and France, which lost 3.35%.
She added, “As financial criminals evolve and quickly adapt to new technologies, financial institutions should be doing the same to protect funds from being lost to the shadow economy. The Napier AI / AML Index has found the UK economy could rescue £90 million annually from reaching criminal organisations each year by implementing AI-powered financial crime compliance solutions that improve the accuracy and efficiency of anti-money laundering efforts.” While AI is the solution, Bastiman warned it is not a silver bullet and still needs human support.
Reactions to the budget
As mentioned, the reaction to the budget has been a mixed bag, with some confident it is putting the UK on the right track and others concerned about how the changes will impact the growth of companies.
One of those that was not excited for the changes was Greg Cox, the CEO of FinTech builder Quint Group. Cox explained, “Bluntly, the new Capital Gains Tax structure won’t help to inspire entrepreneurs to take risks and build companies and will make attracting investment more challenging, even while maintaining the business asset disposal relief.”
With creating a company requiring a lot of risk, Cox believes entrepreneurs should be rewarded for this path, as opposed to simply taking a traditional employment route. The budget changes could see some people hesitant about starting a company, something that could take its toll on the UK’s FinTech landscape.
“While the UK remains one of the world’s top FinTech hubs, with a thriving ecosystem and remarkable talent base, today’s hikes will mean some entrepreneurs will think longer and harder about building a company and firms will need to keep finding creative, sustainable ways to grow in yet more adverse economic conditions.”
Despite this, Cox isn’t worried that this would mean the end of the UK’s FinTech startup culture. “Many of today’s most successful companies emerged in challenging times. A tough investment landscape can inspire founders to prioritise lean, high-impact strategies and embrace risk with confidence. If anything, times like these bring forward bold ideas that might not emerge otherwise. The UK’s fintech landscape has a proven track record, and the opportunities for those ready to innovate and commit to their vision are as promising as ever.”
The idea that the number of entrepreneurs declining following this budget is something Gilbert Verdian, Founder and CEO at blockchain developer Quant, sees as unfounded. He said, “The imagined ‘mass entrepreneur exodus’ makes for a good headline, but it is more rhetoric than reality. There are many, many more of us entrepreneurs who are committed to staying put and paying our fair share. Nowhere else can match London when it comes to talent, capital raising, and stable regulation. These advantages have been built up over centuries of competitiveness and innovation and – regardless of tax tweaks – are here to stay.
“It may be painful in the short-term, but this is the budget we need to have. We need to remember that in the long run, this will increase government investment in large infrastructure projects and public services, boosting the health of the whole economy. Ultimately, the Budget can be seen as a catalyst for future growth.”
Capital Gains Tax
A key area of contention are the changes to capital gains tax. Many in the wealth management sector expressed their concerns on how this could impact the market.
Nicholas Hyett, Investment Manager at investment firm Wealth Club said, “The capital gains tax straight jacket has been pulled steadily tighter for years. Between 2022 and 2024 the tax-free allowance for CGT was cut from £12,300 to £3,000, and the decision to raise CGT rates across the board today will only make matters worse.”
The biggest concern Hyett has with the budget is that it is a ‘far cry’ from the growth-focused, business-friendly budget originally billed. This rise in capital gains tax only impacts a minority but hinders the desire to take risk, he added.
This pessimism for the future of investing is shared by many others in the sector.
Tiago Veiga, CEO at reconciliation software provider Aurum Solutions, said, “Hiking the rate of capital gains tax is counterintuitive to the UK’s ambition of becoming an established global hub for technological innovation and FinTech. What we need to be doing is creating an environment that enables businesses to generate wealth, and incentivise growth, not the opposite.
“The onus is now on entrepreneurs to drive even greater growth, so they can reap the same rewards. To do so, businesses should focus on proactively finding the tools they need to scale sustainably, and this starts with enlisting time and cost-saving solutions.”
In a similar vein, Laurent Descout, co-founder and CEO of treasury services platform Neo, explained, “It’s disappointing to see the Chancellor moving forward with the increase in Capital Gains Tax, as this risks undercutting vital support for start-ups at a time when they need it most. This coupled with the national insurance hike represents a significant blow to businesses. The UK should be fostering a pro-growth environment, especially given the recent spike in insolvencies and this tax increase feels like a step in the wrong direction for the business community.”
Sarah Coles, the head of personal finance at financial services firm Hargreaves Lansdown, is also of the opinion this budget is a blow for investors but believes it could have been worse. “This could have been worse, with suggestions of a doubling of the rate, but it’s scant consolation for anyone hit with a bigger tax bill.”
One of the biggest problems Coles sees with the changes to capital gains tax is the worry it will prevent newcomers from creating their own portfolios. She noted, “Already far fewer people in the UK invest than elsewhere in the world, and this could compound the problem.”
As for existing investors, Coles worries some might focus on tax considerations rather than the investments that make the most sense for their circumstances. It could also lead to investors hoarding assets for lengthy periods.
“Talking about things like capital gains tax as ‘wealth taxes’ obscures the fact that many people on average incomes, who’ve invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more, so investors should consider how to protect themselves.”
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