New tax changes’ impact on STEM companies

The Chancellor of the Exchequer, Rachel Reeves, delivered the first budget of the new Labour government to the House of Commons on 30 October 2024, describing it as a budget to rebuild the UK. The chancellor stated that the proposed tax changes would raise an additional £36.2bn, a year on average in additional revenue for the UK government. The question is how will the new budget affect STEM companies in the UK.

National insurance contributions

The rate of employers’ national insurance contributions will rise from 13.8% to 15% on employee earnings over £5,000, which was reduced from the previous threshold of £9,100. This will increase payroll costs for employers and put pressure on smaller companies and startups which have tight budgets and have to monitor their workforce spending, especially in the  early stages of growing a business.

Capital gains tax

For disposals made on or after 30 October 2024, the lower rate of capital gains tax will rise from 10% to 18%, and the higher rate from 20% to 24%. This will affect investors and founders disposing of shares in their business,. The increase to capital gains tax may discourage some investors from funding high-risk high-reward ventures.

In addition, Capital gains tax rates for business asset disposal relief and investors’ relief (BADR) will rise to 14% from 6 April 2025 and match the main lower rate of 18% from 6 April 2026. The 4% increase may reduce the benefit for entrepreneurs selling STEM focused businesses. This staggered increases to the BADR rates hints at future increases to the capital gains tax rates which may well increase in proportion to the BADR rates.

Even though the above national insurance contributions and capital gains tax increases may be a disappointing outcome of the October budget for may  high growth companies, it is crucial to note the positive outcomes from the October budget which are in favour of high growth  companies. This includes the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) as well as the Research and Development (R&D) tax relief.

The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT)

The Government decided to extend the two leading investment schemes for an additional 10 years from April 2025 to April 2035. The extensions will support startups and entrepreneurs to promote business growth and rebuild the UK. The schemes have been created to encourage investment into new or young companies through tax-relief incentives. The concept behind the schemes is to encourage innovation, creating jobs for the British population and promoting economic growth. The schemes provide the investors with up to 30% upfront income tax relief and an exemption from capital gains tax on any profit made after the sale of shares in the company.

Research and Development (R&D) tax relief

The R&D tax relief was created by the UK government in order to encourage investment in innovation by providing tax relief for qualifying R&D activities. R&D tax relief is a major benefit to high growth companies operating in the UK. The scheme encourages innovation by reducing the financial burden associated with developing new or improving the existing products, processes, services or technologies.

The R&D tax relief allows small and medium sized enterprises to deduct an extra 86% of the qualifying costs from the trading profit for tax purposes, as well as the normal 100% deduction, to make a total of 186% deduction. Larger companies can benefit from a 20% tax credit on qualifying R&D costs.

Following the October budget the R&D tax relief scheme will remain in force, however, there will be stricter rules on eligibility and claim verification.

Should you wish to discuss the impact of the recent tax changes, then contact a member of our Corporate team.