Entrepreneurs Warn Capital Gains Tax Hike Could Harm Startups and Reduce Tax Revenue
A group of 500 British entrepreneurs has cautioned Chancellor Rachel Reeves against raising capital gains tax (CGT) to as high as 39% in the upcoming Budget, arguing it could harm businesses and reduce tax revenue. In an open letter signed by founders of companies like Signal AI, Yonder, and Zopa, the entrepreneurs expressed concerns that increasing CGT or reducing business asset disposal relief (BADR) would undermine the UK’s startup ecosystem.
The founders contend that a higher CGT rate would render the UK less attractive for entrepreneurs, positioning the country with the second-highest CGT rate in Europe. This, they assert, would weaken the incentives to start and grow businesses.“Higher CGT would jeopardize the success of our country’s startup ecosystem by enormously weakening the incentive individuals have to build businesses,” they stated.
Moreover, they warned that rather than boosting government revenue, a CGT hike could backfire by discouraging investment and entrepreneurial activity, ultimately leading to reduced long-term tax revenues. "HM Treasury could well end up lowering the tax take overall,” the letter pointed out, referencing previous government modelling suggesting that taxing capital at higher rates than labour income could hinder long-term prosperity.
Experts suggest that since CGT rates were lowered in the last Conservative Budget, the government may find it easy to justify a return to higher rates.
Given these potential changes, it is crucial to evaluate your financial strategy and consider how increased CGT rates could affect your business's profitability and investment decisions.
Chancellor Rachel Reeves Defends Possible Increase in Employers’ National Insurance, Sparking Concerns for Businesses
Chancellor Rachel Reeves has defended the possibility of raising employers’ National Insurance (NI) contributions, asserting that such an increase would not violate Labour's commitment to avoid tax hikes on working people. This discussion follows revelations of a £22 billion budget shortfall, prompting considerations for tax increases to support public services.
Reeves clarified that Labour's manifesto pledge not to raise income tax, NI, or VAT applies specifically to individuals, excluding businesses from this commitment. She emphasized, "We were really clear in our manifesto that we weren’t going to increase the key taxes paid by working people.” Consequently, the argument is that employers’ NI contributions were never protected under this promise.
However, business leaders are sounding alarms over the potential implications of this move. Paul Johnson, director of the Institute for Fiscal Studies (IFS), cautioned that raising employers' NI would indeed breach Labour's manifesto. He noted that such an increase could lead to lower wages, echoing the Office for Budget Responsibility's (OBR) warning that higher employer NI contributions may reduce employee pay.
In addition, Reeves has hinted at possibly applying NI to employer pension contributions, which could generate an estimated £17 billion annually. However, this could further strain businesses already grappling with economic challenges. Despite these considerations, Reeves has reiterated Labour’s commitment to avoiding austerity measures, promising tax increases aimed at stabilizing public finances without cutting essential services.
The upcoming budget may impose higher taxes on businesses, particularly impacting wages and job creation. Business leaders have raised significant concerns regarding the effects of increased employment costs on the broader economy, especially for smaller firms struggling to recover from recent economic challenges.
Hike in National Insurance Could Devastate Small Businesses, Warns FSB
The Federation of Small Businesses (FSB) has issued a stark warning that increasing employers’ National Insurance Contributions (NICs) would disproportionately harm small and medium-sized enterprises (SMEs). Craig Beaumont, executive director at the FSB, emphasized the damaging impact on job creation and local economies, stating: “You don’t get to a pro-small business budget without the government honouring its cast-iron manifesto commitment to not increase national insurance contributions, including on small employers.”
Beaumont highlighted that such a hike would make maintaining jobs more expensive for SMEs, accelerating the current decline in job numbers. He added, “At a stroke, this will make every job in all our local communities more expensive to maintain, which will see the current fall in job numbers in UK SMEs gather pace. Fewer jobs and lower pay is not the way forward.”
Kate Nicholls, chief executive of UK Hospitality, reiterated the concerns, calling the potential NIC increase “a tax on jobs.” She stressed that higher NICs would create obstacles for businesses looking to hire, grow, and take risks on recruitment, stating, “An increase in NICs makes it harder to employ people and to take a risk on recruitment and expansion because the costs of it will be so much higher.”
The warnings come amid growing fears that an NIC hike would stifle job creation, particularly in smaller businesses, and burden employers at a time when many are already struggling to recover from economic challenges.
Reeves Poised to Target Employer Pension Contributions in Upcoming Budget
Experts are sounding alarms that salary sacrifice schemes may be at risk in the upcoming budget. Business Secretary Jonathan Reynolds has hinted at changes that could significantly affect both employers and employees.
Salary sacrifice schemes - where employees exchange part of their salary for pension contributions - could become less attractive under these proposed changes, particularly for smaller businesses. The added costs may prompt employers to cut back on pay rises, bonuses, and other benefits, diminishing workers' overall compensation and their ability to save for retirement.
Experts warn that if National Insurance (NI) is imposed on employer pension contributions, the consequences could be severe.
If these policy changes are implemented, they could discourage employers from offering salary sacrifice schemes, negatively affecting retirement savings and making it more challenging for businesses to remain competitive. Smaller firms, in particular, may struggle to continue offering these tax-efficient benefits, widening the gap between large corporations and SMEs in attracting and retaining talent.
How Can Qubic Help?
To navigate these potential changes, Qubic offers tailored tax planning services. Our expertise can help mitigate the impact of higher taxes and leverage current reliefs effectively. The window of opportunity to leverage current tax rates and reliefs is narrowing, and the time to act is now.
We understand that the uncertainty surrounding tax changes can be challenging, and we are here to help you.
For more information on our tax planning services and to discuss your options with one of our team, simply click the link below:
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