In the first Labour Party financial statement in over 14 years, the UK’s Chancellor of the Exchequer, Rachel Reeves, raised capital gains tax from 10% to 18%, with a higher rate of 20% to 24%.
Outlined in the UK Autumn Budget yesterday, these increases on businesses profits form part of Reeves’ plans to raise £40bn in taxes by the OBR’s (Office for Budget Responsibility) forecast.
Much of Reeve’s budget statement centred around “putting pounds back in people’s pockets” and focusing on “restoring economic stability”. With the UK being one of the leading financial markets in the world, it may come as no surprise that the Labour Party taxed these companies to help fund public service and infrastructure spending.
Reacting to the Chancellor’s decision to increase capital gains tax, Laurent Descout, Co-Founder and CEO of FX risk management service Neo, believes this represents a “significant blow to businesses”.
He said: “It’s disappointing to see the Chancellor moving forward with the increase in capital gains tax, as this risks undercutting vital support for startups at a time when they need it most.
“This coupled with the national insurance hike represents a significant blow to businesses. Such moves discourage essential investment in startups, threatening their growth trajectory, IPO prospects and the jobs they create.
“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.”
The UK’s fintech market is one of its leading economic growth drivers over the past several years, creating multi-billion pound companies such as Revolut and Monzo, whilst also developing and fostering innovative payment solutions.
However, capital funding within the UK fintech market has stagnated over the last two years. This is a result of macroeconomic and geopolitical tensions that have spilled over, coupled with rising prices, high interest rates and inflation.
According to KPMG research, there were 198 Mergers and Acquisitions (M&A) across UK fintech in the first half of 2024, down from the 284 deals completed during the first half of 2023.
Furthermore, fintech deals amounted to a total of £1.54bn for H1 2024, a harsh fall from the £2.4bn invested in venture capital deals during the second half of 2023.
Greg Cox, CEO of Quint Group, echoed a similar sentiment to Descout whilst believing that the rise in taxes on businesses may deter up-and-coming entrepreneurs from entering the fintech market and providing the innovation it has thrived on for years.
“Bluntly, the new capital gains tax structure wont 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,” said Cox.
“Entrepreneurship involves a lot of risk, which needs to be rewarded relative to taking the more typical path of full time employment and job security. While the UK remains one of the world’s top fintech hubs, 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.
“That being said, 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.”
As previously mentioned by Cox, the fintech industry in the UK has had to endure a few years of hardships in the face of rising prices and inflation, with the new capital gains tax adding another dilemma.
However, this should not deter young entrepreneurs and startups as the UK market is far and away the most invested across Europe, with London being the second largest fintech market just behind Silicon Valley.
Adjustments may be needed at various fintech companies in the coming months as the increased tax on profits will set in, but a heightened focus on diversifying product offerings may offer a blessing in disguise even if they believe the short term future looks bleak.