UK tech founders breathe a sigh of relief as Labour announces lower capital gains tax increase than anticipated.

• On Wednesday, Rachel Reeves, the Finance Minister, raised the capital gains tax (CGT) and increased the rate of tax under the entrepreneurs' relief scheme as part of her comprehensive budget statement.
• The government's tax plans could lead to a tech "brain drain," as warned by the British tech lobby group Startup Coalition, which had caused angst among tech founders in the country.
• A tech founder who had threatened to relocate to the U.S. due to anticipated tax changes expressed satisfaction with Wednesday's announcement, stating that it was better than expected.

The British Labour government on Wednesday revealed plans to increase the capital gains tax rate on share sales, providing some relief for technology entrepreneurs concerned about a potential intensified tax attack on the wealthy.

On Wednesday, Finance Minister Rachel Reeves announced an increase in capital gains tax (CGT) as part of her budget. The lower rate will rise to 18% from 10%, while the higher rate will climb to 24% from 20%. This is expected to generate £2.5 billion in revenue.

"Reeves stated that in order to drive growth, promote entrepreneurship, and support wealth creation, while also generating the necessary revenue to fund public services and restore public finances, the U.K. would maintain the lowest capital-gains tax rate among European G7 economies, even with the increased rate."

Reeves assured entrepreneurs that the business asset disposal relief (BADR) scheme would remain in place, as he maintained the £1 million lifetime limit on capital gains from the sale of all or part of a company.

She emphasized that the rate of CGT applied to entrepreneurs selling all or part of their business under BADR will be increased to 14% in 2025 and 18% a year later, which still represents a "significant gap compared to the higher rate of capital gains tax."

In addition to his plans, Reeves declared that he would increase the National Insurance (NI) rate for employers. Currently, the NI rate is 13.8% on earnings above £9,100 per year, which will soon rise to 15% on salaries above £5,000 a year.

The Labour government's debut budget Wednesday aimed to close a multibillion-pound funding gap in public finances through sweeping fiscal changes.

'Brain drain' feared

Reeves' announcement regarding capital gains tax changes was met with backlash from tech founders and investors, who had been anticipating an increase in CGT and had been feeling anxious about it prior to the announcement.

The Startup Coalition, a British tech lobby group, cautioned in a blog post on Monday that Reeves' tax plans might lead to a "brain drain" in the tech industry.

A survey of 713 founders and investors conducted by Startup Coalition and Beauhurst revealed that 89% of those polled would consider relocating themselves or their business abroad, with 72% having already explored this possibility.

If the government increased the CGT rate, 94% of founders would consider starting a company outside of the U.K.

According to Dom Hallas, executive director of Startup Coalition, although the survey results were disheartening, he believes that founders will not "abandon ship" during tough times because they are aware of the importance of taxes in society.

After Reeves' budget speech, Hallas informed CNBC via text message that any budget that includes increases to CGT and NI, as well as gradual increases to BADR and taxes on investors, would be difficult for founders to accept, especially since it would mean an increase in taxes on their businesses.

He stated that the Government has addressed the concerns of entrepreneurs and struck a balance, including maintaining R&D investment.

Last week, Cleo CEO and co-founder Barney Hussey-Yeo revealed to CNBC that he was contemplating relocating to the U.S. due to Labour's proposed tax changes.

Many founders are already leaving or considering leaving, and they are eager to move to Silicon Valley, according to Hussey-Yeo, who spoke to CNBC at Accel's EMEA Fintech Summit in London last week.

Despite not responding to a request for comment on his plans to move abroad, Hussey-Yeo told CNBC that the budget announcement was better than expected and that it appears the government listened to entrepreneurs.

Focus on growth-oriented policy

Keir Starmer's election manifesto prior to becoming prime minister emphasized fostering growth and innovation in the U.K., which is now being urged by tech entrepreneurs and investors.

Early-stage firms in the UK are facing challenges in securing pre-seed and seed funding, with VCs having a lower risk appetite. A higher CGT will only make it more difficult for these firms to raise capital. Phil Kwok, co-founder of EasyA, an e-learning startup, shared this insight with CNBC via email.

He stated that due to the various elements in play, investors and the next generation of entrepreneurs may turn their attention to markets such as the U.S.

Hannah Seal, a partner at Index Ventures, advised CNBC that the government should facilitate reforms that encourage startups to attract talent through employee ownership and ensure all regulators prioritize innovation and growth.

To remain a globally competitive hub for innovation, the U.K. must implement startup-friendly policies, as she emphasized.

To remain competitive, the government should consider the collective impact of policies on growth, said Edgar Randall, managing director of U.K. and Ireland at data and analytics firm Dun & Bradstreet, in an interview with CNBC.

Policies affecting energy expenses, employer National Insurance payments, and tax rules on capital gains and dividends are among those that have an impact on energy costs.

Randall stated that business decisions are not solely based on fiscal policy, but also take into account the entire ecosystem.