UK Budget Announcement and its Implications

In a pivotal budget announcement, the UK government introduced several adjustments to corporate and individual tax structures, impacting a broad spectrum of businesses, from early-stage startups to well-established firms. For founders, investors, and companies like FounderCatalyst, these changes bring both opportunities and challenges as they navigate a complex landscape of incentives and increased tax obligations. Here’s a breakdown of a few budget modifications and their potential implications on the UK startup ecosystem.

So, what are the changes?

Extension of Enterprise Investment Schemes (EIS)

The UK government has extended the Enterprise Investment Schemes (EIS) until 2035, reaffirming its commitment to fostering innovation and supporting early-stage businesses.

Impact for Founders

The extension of EIS until 2035 is significant for founders, offering an extended period to attract investment. Startups often face challenges in securing financing, so this continuity in investor incentives ensures a steady flow of potential funding. Founders can confidently plan longer-term strategies, knowing that this support structure will remain available. Click here to learn more about S/EIS.

Impact for Investors

The extension of EIS until 2035 reassures investors that they can continue to benefit from tax reliefs when investing in early-stage businesses. This creates a stable investment landscape that promotes confidence and supports long-term capital flow into startups.

Increase in Capital Gains Tax (CGT)

Capital Gains Tax has been raised from 20% to 24% for higher rate tax payers. While this remains one of the lowest rates in Europe, the increase may temper the appeal of entrepreneurial exits and acquisitions.

Impact for Founders

Coupled with the changes to BADR (more on this below), founders are facing increased taxation upon an exit. Founders could look to make use of SEIS themselves or may push on for a higher exit value to offset the higher tax impact.

Impact for Investors

Qualifying SEIS/EIS investments remain fully CGT exempt, meaning that qualifying startups should appeal to investors looking to manage their CGT exposure.

Business Asset Disposal Relief (BADR)

BADR remains at 10% on a lifetime allowance of £1 million for this year, but will increase to 14% from April 2025 and 18% from April 2026. This relief is an essential part of the tax landscape for entrepreneurs considering an exit.

Impact for Founders

For founders planning eventual exits, the phased increase in BADR rates might create a rush of business sales in the first quarter of next year to lock in the 10% rate or hold off until their businesses appreciate significantly in value to offset higher future taxes. In order to hold on to more cash upon exit, some founders invest in their own company under SEIS. Click here to find out more.

Impact for Investors

N/A

Inheritance Tax (IHT)

Inheritance tax thresholds have been frozen until April 2030, which means any increase in asset value may lead to larger tax liabilities in the long term as inflation and company valuations grow. The updated rules also mean that from April 2026, Business Property Relief will no longer be a 100% relief above the value of £1 million. 50% of the value of business assets (including S/EIS shares) that exceed £1 million will not be taxed, and the remaining 50% will be subject to Inheritance Tax charged at 20%.

Impact for Founders

With the IHT threshold frozen until 2030 and new rules applying from 2026 that subject business assets beyond £1 million to a 20% effective tax rate, founders should revisit their estate planning. This is crucial for those looking to pass on their businesses, as these changes could significantly impact long-term wealth transfer strategies.

Impact for Investors

Investments in S/EIS shares, previously fully exempt from IHT thanks to the Business Property Relief are now taxed as above and investors who hold substantial SEIS/EIS shares should review their estate planning.

Employers’ National Insurance Contributions

From April 2025, the employer National Insurance rate will rise by 1.2 percentage points to 15%. Additionally, the Secondary Threshold (the salary level at which National Insurance becomes payable) will be reduced from £9,100 to £5,000 per year. To counterbalance these increases, the Employment Allowance will be raised to £10,500 and extended to more businesses.

Impact for Founders

The increase in employer National Insurance to 15% and the lower Secondary Threshold could make hiring more expensive for startups. Founders will need to carefully evaluate hiring plans and budget allocations. However, the increased Employment Allowance provides some relief, allowing small startups to cover up to four full-time employees at the National Living Wage without additional National Insurance costs.

Impact for Investors

N/A

Corporation Tax Capped at 25%

The government has capped corporation tax at 25%, positioning the UK as a competitive option within the G7 nations. Though the rate has risen in recent years, capping it at 25% aligns the UK’s corporate tax structure with international benchmarks, potentially encouraging businesses to retain and reinvest their earnings.

Impact for Founders

Capping corporation tax at 25% brings a measure of predictability to founders' financial planning. Despite recent rate increases, the cap ensures that profitable startups can budget effectively and reinvest confidently in growth.

Impact for investors

A 25% cap on corporation tax signals stability, which benefits investors by allowing clearer projections of company profitability and return on investment. This cap supports reinvestment strategies, making the UK an attractive environment for continued investment in profitable startups.

Final thoughts…

Whilst many expected the changes to be more punitive to entrepreneurs, some still posit that the changes to CGT and BADR make the UK a far less attractive place to start or exit a company.

The recent measures do however, offer a number of positives for entrepreneurs and small businesses in the UK. The extension of the Enterprise Investment Scheme through 2035 provides a long-term boost, encouraging investment in early-stage companies and supporting startup growth. With Corporation Tax capped at 25%, the lowest rate among G7 nations, the UK remains an attractive base for businesses seeking competitive tax advantages. While Capital Gains Tax (CGT) rates will rise modestly, they still remain among the lowest in Europe and other developed economies, helping preserve incentives for investment. Moreover, smaller businesses will benefit from the increased Employment Allowance, enabling them to hire up to four full-time employees at the National Living Wage without incurring employer National Insurance costs, a change that bolsters small business growth and employment. Together, these measures could provide a stable, growth-oriented environment for British startups and SMEs.

How we can help

As the incentives for UK founders are shifting with upcoming changes to Business Asset Disposal Relief (BADR), there’s never been a better time to leverage the Seed Enterprise Investment Scheme to invest directly in your own startup. SEIS not only offers significant tax relief but also explicitly allows founders to invest in their own companies under the SEIS legislation (ITA07/S257BA). This provides a powerful way for founders to support their startup’s growth while benefiting from SEIS tax advantages. Learn more about how FounderCatalyst can help you invest in your startup under SEIS.

NB: Check out the official budget press release here.