Rachel Reeves has delivered the first Labour Budget in 14 years against a backdrop of ongoing economic uncertainty. Factors such as the continued recovery from the Covid-19 pandemic, a newly identified £22bn “black hole” in public finances and a public services sector crying out for investment all led to rumors of major tax hikes and changes to schemes essential for promoting the UK as a global entrepreneurial hub. Many expected this to be a challenging Budget, with a potentially negative impact on entrepreneurial businesses in the UK.
Frazier & Deeter supports a significant number of high-growth, scaleup SMEs and entrepreneurs across the life sciences and technology industries. We have outlined below the main impacts of the Budget announcements on these businesses, their founders, employees and investors.
Business Taxes
Employers’ National Insurance
The change in employers’ National Insurance (NI) was by far the biggest tax raising measure announced in this Budget, and the one which will have the largest impact on UK business. From 6 April 2025, the rate of employer NI contributions (NICs) will increase from 13.8% to 15%. The Secondary Threshold, which is the per-employee threshold at which employers become liable to pay employer NI, will decrease from £9,100 to £5,000.
The new Secondary Threshold rate of £5,000/year is fixed from 6 April 2025 until 6 April 2028, after which point it will increase by the Consumer Price Index (CPI).
For an employee on an annual salary of £40,000, this will increase the employer’s NIC cost from £4,264 to £5,250 per annum from 6 April 2025 onwards.
The Government also announced an expansion of the Employment Allowance by removing the £100,000 eligibility threshold and increasing the allowance from £5,000 to £10,500 from 6 April 2025. Currently only employers with an annual NIC bill (employee & employer combined) of less than £100,000 are eligible for the Employment Allowance, so the removal of this eligibility threshold will ensure most small employers now qualify for this allowance and can reduce their annual employer NIC bill by £10,500 per year.
With the Employment Allowance changes, the Government expects that 865,000 businesses will pay no employers NICs at all, and more than half of employers with NICs liabilities will either see no change or will gain overall next year.
The total tax expected to be raised from these changes is an eye watering £25bn per year!
Corporation Tax
It has been confirmed that the maximum rate of corporation tax will stay at 25% for the duration of this Parliament, maintaining the UK’s position as the lowest tax rate in the G7 and continuing to mark it as an attractive destination for entrepreneurship. Similarly, the small business rate of 19% will be maintained.
Capital Allowances
The Government has extended 100% First Year Allowances (FYA) for qualifying expenditure on zero-emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle charge points up to 31 March 2026. Additionally, the Government has maintained the £1m Annual Investment Allowance, contributing to valuable tax savings for SMEs.
R&D Tax Relief
Tax advisors collectively breathed a sigh of relief when the Chancellor made no further changes to the R&D tax credit system, instead opting to focus on the existing amendments. As a reminder, the key differences we see under the new merged R&D scheme for accounting periods beginning after 1 April 2024 are set out in the article here.
The Chancellor announced additional support for the knowledge economy, promising specific R&D funding for the aerospace and automotive sectors, as well as a new Life Sciences Innovative Manufacturing Fund. There was also a commitment made to support innovative clusters in Glasgow, Greater Manchester and the West Midlands, which will spread the benefits of the Government’s support around the country.
Personal Tax
Capital Gains Tax
As widely anticipated, the Government announced an increase in the rate of Capital Gains Tax (CGT).
The main rates of CGT are currently charged at a lower rate of 10% (for basic rate taxpayers) and a higher rate of 20%. These rates will be increased to 18% and 24% respectively for disposal made on or after 30 October 2024. These new main rates will align to the current residential property rates, which are not changing.
We are pleased to see that the Government did not increase the main rates of CGT to current income tax rates (20% for basic and 40% for higher rate taxpayers). There had been concerns that a significant rise in CGT rates would discourage entrepreneurship in the UK.
Business Asset Disposal Relief and Investors’ Relief
There are two reliefs which currently offer access to a lower rate of CGT on disposal of shares: Business Asset Disposal Relief (BADR) and Investors’ Relief (IR).
- BADR is available to employees who acquire shares from Enterprise Management Incentive (EMI) stock option schemes and employees/founders who hold at least 5% of shares (/voting rights) in their company for at least 2 years before the sale of their shares. BADR is subject to a £1m lifetime limit per taxpayer, meaning any qualifying disposals that exceed this limit will be taxed at the main CGT rates.
- IR is available to individual investors who dispose of ordinary shares in unlisted trading companies, which they have owned for at least 3 years and that satisfy certain criteria, such as the investor or any connected person not being an employee of the company. The lifetime limit for IR was £10m.
The rate for both BADR and IR will increase from 10% to 14% from 6 April 2025 and will increase further to 18% from 6 April 2026, to match the main lower rate of CGT from the 2026/27 tax year onwards. The Government has also announced the reduction of the lifetime limit for IR from £10m to £1m from 30 October 2024, to align with the current lifetime limit for BADR.
BADR currently gives founders and employees who hold EMI options a preferential tax rate of 10% on the first £1m of capital gain on the disposal of their qualifying shares in a trading company. This provided a 10% savings when compared to the main rate of CGT rate of 20%. The effect of today’s announcements on BADR will be as follows:
- For gains realised between 30 October 2024 and 5 April 2025, BADR now represents a 14% tax saving of the first £1m of a qualifying gain (difference between 10% BADR rate and new 24% main rate);
- From 6 April 2025 to 5 April 2026, that BADR tax saving returns to 10% on the first £1m (difference between 14% BADR rate and 24% main rate);
- From 6 April 2026 onwards decreases to 6% on the first £1m (difference between new 18% BADR rate and 24% main rate).
BADR should still remain an attractive tax relief/incentive for founders and employees of SME companies, especially with the increase to the main rates of CGT. We welcome a review of the £1m lifetime limit to take account of inflation and to help ensure that the UK remains a competitive location for entrepreneurial activity.
Changes to the Non-Dom Rules
The Government confirmed it will abolish the remittance basis of taxation for non-UK domiciled individuals and replace it with a simpler regime, which will take effect from 6 April 2025. Individuals who opt-in and qualify for the new regime will not pay UK tax on foreign income and gains (‘FIG’) for the first 4 years of tax residence. To qualify for the new FIG regime, the Government will introduce a new residence-based system. Key highlights of the FIG regime from the proposals already announced include:
- For CGT purposes, where certain conditions are met, current and past remittance basis users will be able to rebase personally held foreign assets to 5 April 2017 on a disposal.
- Overseas Workday Relief will be retained and reformed, with the relief extended to a 4-year period and a removal of the requirement to keep the income offshore. The amount claimed annually will be limited to the lower of £300,000 or 30% of the employee’s employment income.
- The Government is extending the Temporary Repatriation Facility to 3 years, expanding the scope to offshore structures and simplifying the mixed fund rules to encourage individuals to spend and invest their foreign income and gains in the UK.
- The Government also announced that it would scrap the planned 50% reduction in foreign income subject to tax in the first year of the new regime.
It is hoped that the new FIG regime will not discourage economically vital technical and skilled workers from coming to work in the UK.
The Budget included the release of the new draft legislation for the FIG regime. We aim to release a full summary of these legislative changes shortly so clients can prepare for 6 April 2025.
Investors
Enterprise Investment Scheme and Venture Capital Trust Reliefs
The Chancellor today confirmed the Government’s commitment to extend Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) relief on qualifying investments until 2035. For SMEs and angel investors alike, this will be highly welcome, as it represents a significant part of the funding landscape for early-stage companies. We do, however, consider there is still scope for simplification of the EIS/VCT rules, particularly around preserving relief and qualifying status as companies expand internationally.
Carried Interest
“Carried interest” is a term used to describe a form of performance-related reward received by fund managers. In July, the Government announced a commitment to reform the tax treatment of carried interest, so it came as no surprise to see changes were included in the Budget. The concern was that carried interest was taxed at CGT rates – which are generally lower than income tax rates. In reality, there were often relatively small amounts of capital put up by the fund managers to launch the funds, and the Government’s view was that the returns made on the small levels of investment were excessive in relation to the economic risks taken. Instead, carried interest payments appeared to be more in the nature of bonuses linked to the good performance of the funds – as such, they ought to be taxed more like income.
The Budget announcement recognises the complexity of the issue and proposes a further consultation period until 25 January next year. Following the consultation period, new legislation would be introduced in a future Finance Bill with a new tax regime for carried interest expected to be effective from April 2026. In the meantime, the Government has chosen to increase the capital gains tax rate on carried interest to 32% with effect from April 2025.
A period of further consultations seems sensible. It is also worth noting that the proposed 32% tax rate is similar to the tax rate charged on carried interest by other major economies [Germany 28.5%, France 34% and US (New York) 34.7%].
Summary
In spite of the talk of black holes and Budget deficits, the measures announced today were less dramatic than many had feared. The lack of change in the corporation tax regime, including the R&D tax relief system, will be welcomed by many. We hope that the announcements will encourage the continuation of entrepreneurial activity and maintain the UK’s competitive landscape for business growth.
For more information, please contact:
Malcolm Joy, UK Managing Partner | malcolm.joy@frazierdeeter.com
Jonathan Clark, Tax Partner | jonathan.clark@frazierdeeter.com
Thomas Wells, Tax Senior Manager | thomas.wells@frazierdeeter.com