Guest blog – The heavy tax burden holding back Britain’s entrepreneurs

“Britain should be the best place in the world to be an entrepreneur” declares the chancellor, Rachel Reeves. “Startups and entrepreneurs are a driving force for greater investment, more jobs, and economic growth” says treasury minister James Murray. “We need to drive growth, promote entrepreneurship and support wealth creation” – again, the chancellor. 

Politicians are all too keen to profess their admiration for entrepreneurs and the critical role they play in the economy. But it appears that the feeling is not mutual. A recent poll showed that the chancellor was the least popular political figure among entrepreneurs, and for good reason. Our recent report on the ‘tax on entrepreneurship’ shows that the cumulative tax on entrepreneurs in Britain stands at a shocking 90 per cent. 

The heavy tax burden on entrepreneurs

At first glance, it seems an extreme figure. After all, taxes on capital gains are ‘just’ 24 per cent, with business asset disposal relief bringing that figure down to 18 per cent from 2026 onwards. But it would be wrong to look at this in isolation when considering the many factors influencing an entrepreneur’s decision to start a new business or grow an existing one. 

Before any money is invested in a business, it first has to be earned. The vast majority of entrepreneurs, 85 per cent, rely on their founders’ personal capital as the initial source of funding. In order to accumulate that capital, many continue working day jobs to support their new venture. Taxes on income thus influence how much entrepreneurs can invest in their business and whether they have the capital to start a business in the first place. 

For every marginal pound earned by basic rate taxpayers, 37p is paid in taxes including income tax and employers’ and employees’ national insurance, rising to 53p - more than half of what is earned - for additional rate taxpayers. Worse, between £100,000 and £125,140 the marginal tax rate rises to 67p due to the clawback of the personal allowance, leaving taxpayers with just 33p in every pound before any money is even invested. 

Once money is invested into a business, any profit is subject to corporation tax ranging from 19 to 25 per cent, depending on the size of the business. When entrepreneurs want to take some of that money out of the business, it is then subject to capital gains tax ranging from 18 to 24 per cent. And finally, when that money is passed on to heirs, as 78 per cent of entrepreneurs intend to do, it is subject to a 40 per cent inheritance tax. 

This means that even assuming a 10 per cent annual return on investment, a single pound earned by an additional rate taxpayer and invested over 35 years only results in £2.71 for their heirs. In a tax free scenario, that single pound would have turned into £28.10, representing a 90 per cent tax rate. 

Available tax reliefs

Of course, there are tax incentives aimed at encouraging investment in start-ups. These include the seed enterprise investment scheme (SEIS) and the enterprise investment scheme (EIS) for companies in early stages of development, which allow up to 50 and 30 per cent income tax relief respectively. Investments under these schemes are also exempt from capital gains if sold, and exempt from inheritance tax if passed down to one’s heirs. Crucially, however, these are only available to external investors and not founders themselves. 

Founders are instead able to reduce their tax liability through tax planning, including making use of business asset disposal relief, or bequeathing the business directly to heirs which eliminates capital gains tax entirely and results in a lower rate of inheritance tax due to business relief. In a tax planned scenario, the tax rate on a marginal pound falls to as low as 84 per cent.

Changes in the tax burden

Yet far from trying to bring this figure down further, the government has contributed to it rising through its tax policies. The choice to raise employer national insurance contributions and capital gains tax, as well as cutting business asset disposal relief and business relief on inheritance tax has led to a rise in the overall tax burden entrepreneurs face, particularly in a tax planned scenario where the tax rate has risen by 4.3 percentage points. 

While individual tax rises may seem small in isolation, taken as a whole they can radically alter incentives for business owners. A recent survey showed that nearly two in five owners of small and medium-sized firms have either left the UK or are considering an imminent departure. As our report notes, entrepreneurship is on a decline in the UK with the number of businesses falling since 2020, reversing a decade of growth since 2010. This has a real effect on the economy, with young companies accounting for a disproportionately large share of job creation. Fewer entrepreneurs makes us all worse off.

Encouraging entrepreneurship

Politicians must stop treating entrepreneurs as an inexhaustible and consequence free source of revenue to be exploited on a budgetary whim. At the most basic level there must be stability in the tax system and a clear vision for the tax environment going forward.

This means sticking to the pledge not to raise VAT, income tax, national insurance or corporate tax, and not trying to sneak tax rises through the backdoor as Labour did in 2024 with the rise in employer national insurance contributions. Both parties are guilty of this, with the Conservatives levying a so-called ‘stealth tax’ by freezing income tax thresholds and allowances in 2021. Ideally the current government’s pledge should be extended to all forms and rates of these taxes as well as all thresholds and reliefs. 

Secondly, the tax system should be aimed at maximising growth. Taxes have a non-linear effect on growth, meaning that as tax rates rise the marginal impact of taxation on growth also rises. With the tax burden set to reach a record high, further tax rises could have a severe impact on entrepreneurship. At the same time reducing the tax burden on entrepreneurs could lead to more innovation, jobs and much needed economic growth. 

There are immediate steps the government can take to achieve this. In addition to reducing tax rates in general, specific reforms like ending the withdrawal of the personal allowance would simplify the tax system and remove the irrational spike in tax rates between £100,000 and £125,140. On corporation tax, firms are currently able to deduct the cost of certain investments from their profits. However, this is limited to plants and machinery, distorting investment choices. Extending this to structures and buildings would result in a more efficient allocation of resources. Extending business rates improvement relief from the current one year would likewise prevent businesses from being punished for investing in their premises, while allowing landlords to claim this relief as well would further stimulate investment.  

Finally, there must be spending restraint. Pledges on tax are not credible when spending continues to rise unabated. Spending is set to average 45 per cent of GDP under this government, a level historically only reached during periods of crises. Only with a credible commitment to controlling spending can tax pledges be made to boost entrepreneurship, something worth a lot more than the empty praise presently offered by politicians. 

The CIOT publishes guest blogs to stimulate debate on tax policy and related matters. The views expressed in guest blogs are those of the writers and are not necessarily shared by CIOT.