Are business founders “working people”?

As the Autumn budget looms, the Labour government has harked back to its manifesto pledge to not increase taxes for “working people.”

However, clarification over who exactly this covers became muddled after Prime Minister Keir Starmer hinted at possible tax increases for those who own shares and assets – which of course includes plenty of startup and small business founders. This comes as ministers refused to rule out National Insurance increases for employers.

When asked to define the meaning behind “working people,” Starmer responded that it was someone who “goes out and earns their living, usually paid in a sort of monthly cheque.”

But this uncertain position begs the question of whether business owners – from bootstrapping founders and side hustle entrepreneurs to freelancers and sole traders – are perceived as “working people”, and if they’ll be taxed further in the upcoming budget.

The importance of entrepreneurship in the UK

A rise in capital gains tax seems all but guaranteed at this point, and it’s a cause for concern among entrepreneurs and those starting their own businesses, who would ultimately hope to profit from the share value of their venture upon sale or exit. Potential buyers or investors would have to factor in the higher tax costs, meaning business owners could see reduced net proceeds they receive from the sale, making the exit less lucrative.

Any such tax increase could feel like a potential deterrent to taking on the long hours, stress and dedicated focus required to launch and run a startup or small business, particularly if CGT were to reach near parity with income tax bands. For founders to face this prospect while being referred to as “non-working people,” it’s an even more bitter pill.

As of January 2023, there were around 5.5 million small and medium-sized enterprises (SMEs) in the UK, which cumulatively employ 99% of the country’s workforce. 1.3 million of these businesses are under 5 years old, while 4.1 million are self-employed or sole traders.

“The UK government must continue to support SMEs, which are navigating an exceptionally challenging landscape,” Laurent Descount, co-founder and CEO of Neo said. “However, the Chancellor’s proposed blanket increase in Capital Gains Tax threatens this vital investment access. It risks deterring investors from backing small, growing companies in the UK, and potentially hampers start-ups from progressing to IPOs or secondary share sales, as investor reward just won’t be there”.

Craig Mehta, co-founder of Know You More, commented: “As a small business owner, the last few years have been extremely challenging. With inflation rising and market competition intensifying, many small businesses, including ours, are struggling with cash flow challenges. Any increases in corporate tax would have a particularly negative impact.

“Additionally, our employees, including myself, are also feeling the strain. We have a limit on how much we can raise wages, and any tax increases on middle earners, such as capital gains or inheritance tax, would exacerbate their financial stress.”

A study by Evelyn Partners revealed that 48% of founders also said they would consider leaving the UK and moving their business abroad if taxes are increased for the Autumn Budget, while just 20% believe the Budget will be good for their business.

“Following the prime minister’s comment in August that the Budget was ‘going to be painful’ we’ve seen an influx of queries from business owners who are anxious about what any potential tax changes could mean for them personally and their businesses, with some mulling the option of becoming non-resident,” Toby Tallon, tax partner at Evelyn Partners commented. 

“With the technology available today some business owners may decide to up sticks and move either themselves or their operations – or both – abroad if they felt they weren’t being made welcome in the UK.”

Should business owners worry about the upcoming tax changes?

An increase in CGT could also dampen investment in businesses, especially via venture capital or private equity funding. Higher taxes on capital gains could reduce the net returns for investors, which can make them more cautious and they might not be willing to invest in high-risk or high-reward ventures. This can limit the funding pool available for new businesses, as well as restrict growth opportunities. 

According to research by Business Matters, 86% of business owners are concerned that increased taxes could hinder their growth, while 78% expressed concern that the Autumn Budget could negatively impact their plans.

Raising these taxes such as CGT could risk deterring entrepreneurship. If founders are charged the same amount of tax as they would when receiving a normal salary, then the hard work and dedication that goes into running a business would hardly seem worthwhile. 

The counterargument to this position is that many people with assets aren’t business founders (eg investors and landlords). These groups don’t pay as much tax compared to someone on a regular salary. For example, someone with income from shares of £50,270 or less will only pay 10% of capital gains tax on that income, whereas the basic rate for income tax between £12,571-£50,270 is currently 20%.

While the government hasn’t yet announced specific figures for tax increases, there are potential risks that can affect a business’s financial health if it faces higher taxes. These include:

• Reduced profit margins: Increased taxes will cut directly into a business’s profit margins, leaving it with less retained earnings for growth or investment. As a result, businesses may need to raise prices or cut wages to offset these costs, risking decreased customer demand or unhappy employees.
• Stagnated growth: Higher tax obligations can reduce the available funds for research, development and expansion efforts. With tighter budgets, businesses may also pause expanding operations or improving infrastructure, which can hinder productivity over time.
• Decreased cash flow: Higher taxes can also put pressure on cash flow, affecting a business’s ability to cover everyday operational costs, make debt payments on time or maintain healthy inventory levels.
• Employee layoffs and reduced benefits: With less revenue, businesses may have to reduce employee benefits and perks, freeze hiring or even lay off workers to manage expenses.

While the Labour government’s tax pledges aim to protect “working people,” there is still uncertainty over how these policy changes will impact small business owners and entrepreneurs, many of whom are critical contributors to the UK economy.