UK Budget could see Scottish entrepreneurs turn their back on country: pension blow

The criticism came as business leaders said small firms had been left shouldering most of the burden from the £40 billion of tax raising measures announced in the Budget, with the increase to employers’ national insurance and lowering of the tax threshold generating well over half of that total.

In her maiden fiscal set piece, Ms Reeves announced a £2.5bn increase in capital gains tax (CGT) by increasing the lower rate from 10 per cent to 18 per cent and the higher rate from 20 per cent to 24 per cent. The tax is charged on profits which are made from selling assets such as a second home or investments, including stocks and shares.

Andrew Noble, a partner at Par Equity, the Edinburgh-based venture capital firm, warned the increases were likely to have a damaging effect on investment and regional innovation.

“Labour’s manifesto was built on a plan to kickstart economic growth,” he said. “Unfortunately, however, the hike in CGT runs in direct contradiction with this mission and disincentivises entrepreneurs [and investors] to build the next generation of companies to meaningfully reform the UK.

“Furthermore, this will have a greater impact on regional innovation in Scotland as current and future entrepreneurs weigh up the most attractive destinations to start and scale their businesses in the next ten to 15 years.

“As a venture capitalist focused on the north of the UK, we know that many entrepreneurs start businesses in Scotland because of the region’s strength in tech and advanced manufacturing, following a successful career in London and further afield. The rise in CGT undermines the strength of the UK’s entrepreneurial spirit, making it harder to attract and retain the very innovation and talent that can grow our economy to a more prosperous future.”

The negative response to the Budget measures was echoed by David Ovens, joint managing director of Edinburgh-based investment syndicate Archangels, who said the tax increases “fly in the face of the government’s pro-business commitments”.

He said: “Given the well-documented importance of SMEs [small and medium-sized enterprises] to economic growth, these changes are a major cause for concern. Business assets disposal relief (BADR), in particular, has been a crucial incentive for entrepreneurs and management teams, encouraging risk-taking and innovation. Nearly doubling the rate, from 10 per cent to 18 per cent in two years’ time, will disproportionately affect those who have invested their time, energy and resources into building businesses from the ground up - not necessarily the wealthiest CGT payers.

“As for CGT, while the rise might not be as steep as some feared, even this marginal increase will contribute to the perception of the UK as an unfavourable place to invest.”

The Chancellor also confirmed changes to inheritance tax (IHT), including bringing pension pots within the tax from April 2027, and reforms to agricultural and business property reliefs, raising a total of £2bn a year.

Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, predicted “a flurry of people revisiting their retirement finances” in the wake of the announcement.

“It’s a decision that will upturn many people’s plans as we will see many more people being dragged into paying inheritance tax because their defined contribution pension is now counted as part of their estate,” she noted. “It’s an issue that will not be felt by those with defined benefit pensions as these cannot usually be passed on.

“The likelihood is we will see people looking to gift more money to loved ones while they are still alive - for instance, money to help people get on the housing ladder. They will also look to spend down their pensions as retirement income rather than leave them untouched, a move which could keep the rest of someone’s estate below the IHT threshold.”

Faye Church, senior financial planning director at Rathbones Group, said the decision to bring pensions back into estates from 2027 was likely to increase the number of estates liable for inheritance tax by almost a quarter.

“Pensions used to be exempt from IHT, allowing people to pass them on unfettered, so it’s important for individuals to revisit their IHT plans now that the goalposts have been shifted,” she said.

In the first Labour Budget since 2010, Reeves outlined a £25bn raid on employers' national insurance contributions, with the rate rising by 1.2 percentage points to 15 per cent from next April, with payments starting when an employee earns £5,000, down from the current £9,100.

Hospitality industry leaders warned that an already fragile sector was facing a “tsunami of employment costs”, including an increase in the minimum wage.

Leon Thompson, executive director of UKHospitality Scotland, said: “This is an extremely tough Budget for our businesses, with employer NIC increases set to significantly impact their finances, alongside higher-than-expected rises in the national living wage and national minimum wage. To support our businesses, it is imperative that the Scottish Government pass on, at least, the 40 per cent business rate relief announced by the Chancellor for hospitality in England. The lack of support in the last two years has left Scottish hospitality businesses in a precarious situation.”

Kate Nicholls, chief executive of UKHospitality, said: “This Budget is the latest blow for hospitality businesses. Rising taxes, increasing costs and fragile consumer confidence risk bringing growth to a grinding halt. In the short term, the tsunami of employment costs coming in April will ultimately do more to hamper growth than incentivise it.

“However, there are reasons for longer-term positivity. I am pleased that the Chancellor is implementing UKHospitality’s recommendation for a permanently lower level of business rates for hospitality. Levelling the playing field in this way recognises the importance of the high street and the role it plays in our communities and economy.

“We need to see the detail and the government must work with the sector in the design and delivery of this significant change to get it right.”