Budget commentary
Impact for entrepreneurs, the PE & VC sector and the Thames Valley
The much anticipated change to tax carried interest as income on private equity fund manager investment gains did not materialise in that this remains taxed as capital gains for now. However CGT is increased from 28% to 32%. The Chancellor stated that there will be further reforms in 2026 so we may well see the income tax basis come in then. But for now at least the private equity industry must be somewhat relieved. The planned abolition of the non-dom tax regime may impact some PE executives who have taken advantage of this status and the increase in CGT on carried interest will impact those PE players who have enjoyed lower rates of tax to date.
We await the full impact of the increase in employers’ NI contributions to 15%, up by 1.2% raising some £25 billion per year; the biggest share by far of the overall £40bn tax increase in this budget. Will this mean higher prices for goods and services for customers; will it mean lower pay rises for employees or even redundancies? Clearly the large increase in employers’ NI will erode operating margins unless corresponding increases in selling prices of goods and services or reductions in headcount can be made. PE firms seek to increase value largely by improving margins through increasing sales opportunities and / or reducing costs; the NI increase will make this more difficult and could result in longer holding periods for portfolio companies with delayed exits and delayed distributions to limited partner investors.
Good news on the new £70bn National Wealth Fund and focus on growth industries such as aerospace, automotive, life sciences, engineering. Mention was made of business accelerators in Glasgow, Manchester and West Midlands. Nothing about the Thames Valley sadly, perhaps Levelling Up is still being followed. The huge boost to NHS with £22.6bn increase for day to day and £3.1bn for capital is really welcome news. Hopefully this means that a new hospital at nearby Frimley will be built and there may be funds for new surgical hubs and more diagnostics centres in Berkshire. The National Wealth fund should unlock £billions in UK clean tech / green and growth industries to encourage and supplement private equity investment in these areas. The plans for increased investment in infrastructure and transportation should improve the conditions for PE investment particularly in the regions; currently some 64% of PE investment is in London and the South East so help for the other less well-served regions of the UK is to be welcomed.
Confirmation of the extension of the EIS and VCT investment schemes to 2035 is good news for entrepreneurs and will encourage continued interest from investors. These schemes were set up by the Conservatives / John Major’s government in 1994/5. But away from these schemes higher rates of CGT for M&A is clearly not welcomed.
Very negative for entrepreneurs is that the Business Asset Disposal Relief (previously known as Entrepreneur’s Relief) when they sell their businesses is to increase from 10% to 14% in 2025 and then to 18% in 2026. Maybe it will be increased to the full 20% thereafter, who knows! In the short term we may see some business being sold before the next tax year to avoid this tax increase, perhaps before reaching their optimal potential – and in the longer term it could result in reduced commercialisation of innovation and less opportunities for venture capital investment.
