“Championing innovation, not stifling it… Our job is to make Britain the best place in the world to start up, to scale up, and to stay”.

Interesting comments in Rachel Reeves’ recent Budget speech, but will recent changes to the tax reliefs be sufficient to support UK innovators? Are tax incentives the best way to keep entrepreneurs?

In this guest post, Bhavika Nesbitt and Emma Richards of the Wilson Partners, discuss how policy makers use tax to incentivise enterpreneurship.

‘Exit tax’ creates a scare

After weeks of anticipation and leaks, Rachel Reeves, UK Chancellor of the Exchequer delivered her budget on 25th November 2025.

One of many leaks, which was ultimately unfounded, was in relation to “an exit tax” on UK entrepreneurs* and their companies, with a suggestion of a 20% tax charge on unrealised gains.

Having to pay cash you don’t have, against a profit you haven’t yet made (and may not crystallise) could certainly deter would-be entrepreneurs from starting a business in the UK when they could just start from other jurisdictions which offer similarly beneficial innovation tax credits.

There have been a number of high profile tech founders moving to Dubai recently, and it is reported that uncertainty over taxation led to entrepreneurs leaving the UK prior to Budget Day**.

Eroding UK’s position as a launch pad

Historically, the common trajectory for British innovators is to establish early operations in the UK, develop IP locally, and then scale into the US once traction has been achieved.

Although, the UK remains a strong launchpad, without competitive incentives, it risks becoming a “stopover” rather than a springboard.

Indeed, a growing number of founders are now incorporating or domiciling directly in the US from day one – particularly in life sciences, deep tech, and high-growth software – areas of UK strength. Some cite access to capital; others note the density of US industry clusters.

Is this the start of a trend that reflects a structural shift in global competitiveness and the erosion of what used to be the UK’s natural advantage as a launch pad?

International comparisons

Against the current economic backdrop, everyone is seeking to attract and retain the best talent in innovation.

Increasingly, founders are bypassing the UK altogether, heading straight to the US to capture scale and capital. The US venture capital market distributed over $170.6 billion in 2023, compared to just £20.1 billion in the UK.

The US is a key player as a country, but also at state-level, as the states aggressively compete with each other to attract founders and their businesses.

Whilst traditionally, tech-focused UK businesses looked to incorporate in Delaware with a physical location in New York or California, now Nevada, Texas, Florida, Utah, Arizona, and North Carolina are emerging as top destinations.

States competing to attract entrepreneurs

Texas in particular has cemented itself as a haven for entrepreneurs, offering low taxes, a deep talent pool, and strong VC activity. Massachusetts leverages its university ecosystem, while California still dominates in venture capital despite higher costs.

For entrepreneurs, this fragmented landscape means incentives vary dramatically – some states front-load tax breaks including targeted R&D incentives, others emphasize scaling support – making location choice a strategic decision in itself.

Many have expanded programmes offering founder relocation grants, innovation districts and sector-specific incentives for life sciences, AI, advanced manufacturing and clean energy.

For UK founders comparing US incorporation options, the difference between states can materially influence both early-stage cashflow and long-term exit value

Creating incentives for entrepreneurs

It would appear that policymakers are concerned about a “steady leakage of UK entrepreneurial talent” towards the US.

The challenge, therefore, is not just to offer incentives, but to design them with foresight – aligning with entrepreneurial realities.

Increases in Enterprise Management Incentives (EMI) and Enterprise Investment Scheme (EIS) limits were both announced in the Budget.

• The Enterprise Management Incentives (EMI)  – the EMI scheme was expanded significantly. EMI allows companies to give share options to selected employees to incentivise and retain them. In the face of rising cost of employment, it enables companies a way to reward talent. In the November budget, company share option value was increased to £6m for companies with up to 500 employees.
• The Enterprise Investment Scheme – EIS aims to encourage more UK investors to invest in UK business. This would mean founders don’t necessarily have to chase US investment, though it cannot be ignored that such investor-founder relationships go beyond financial investment, to strategic partnership and other business matters.

Ms Reeves also announced an increase to UK Research and Innovation (UKRI) grant funding, which is aimed at safeguarding the core capability of the UK’s research and innovation ecosystem. UKRI will receive a substantial budget of £8.811 billion for 2025–26.

R&D Tax Credits – unintended consequences

Prior to the budget, previous changes to R&D schemes had created friction for innovative SMES, many of whom have found their claims decreased.

HMRC statistics show that £7.6 billion of R&D tax relief was claimed in 2023–24, covering £46.1 billion of R&D expenditure.

Yet the number of claims has collapsed: 46,950 in 2023–24, which is down from 2021–22 by approximately half. SMEs have been hit hardest, with relief falling to £3.15 billion, down nearly 30% year-on-year, while large firms under the RDEC scheme saw relief rise to £4.41 billion.

A number of factors caused this reduction:

Exclusion of overseas contractors from R&D claims (unless the work cannot be carried out in the UK)

This was introduced with other changes making it easier for companies to access both grants and R&D credits, as well as enabling larger companies to claim for contracted out costs for the first time.

However, this has resulted in a reduction in claim values for a lot of SMEs. For example, many software start-ups were hiring in Poland, Lithuania and Estonia, where costs are lower, engineering talent cheaper and regulatory burdens lighter, these costs can no longer be claimed.

PAYE Cap

Whilst the position has always been that external consultancy costs are limited to 65% eligibility (to strip out the element of profit in consultants’ payments from the claim) the PAYE cap which restricts the total repayable credit that can be made is set at £20,000 and can hit startups hard.

Start-up companies who are unable to afford the cost of adding employees to their payroll, typically use more affordable and flexible resource such as consultants, paid on an hourly basis, however their costs are restricted to 65% for the R&D claim. This restriction of relief is often further compounded by the company having few employees, meaning they have limited PAYE and often have their repayments restricted to the £20,000 cap.

Time sensitive

To those new to the R&D tax credit process, or those who have not made a claim in the last three years, there is an additional danger; if they don’t engage with their tax advisers promptly, there is a real risk that they could miss their first year of claim.

R&D rules require companies to pre-notify HMRC within 6 months of the company’s year end that it intends to claim R&D tax credits. There is no margin for error – miss the deadline, and you can’t make a claim.

Silver lining

But there was also a silver lining for those companies who have historically not been able to claim SME R&D relief due to subsidies or grants. This has changed, R&D activities which are in receipt of subsidies or grants can now be included in an SME R&D Intensive claims (subject to R&D Intensity conditions being met).

Changes to R&D Tax Credits announced

To reset R&D tax credits, Ms Reeves announced a new R&D Advance Assurance service to be launched in Spring 2026.

This aims to give innovators the ability to

• confirm their eligibility for R&D tax credits in the UK
• seek confirmations over overseas expenditure exemptions, contracted out expenditure, and exemption from the PAYE cap.

In principle, this represents a positive step for SMEs, offering greater certainty and transparency upfront regarding their R&D claims.

However, as with the existing advance assurance scheme, its effectiveness will depend on HMRC’s ability to implement a flexible process that is efficient, timely, and consistent in its application.

Is the UK still the ideal origin point for R&D-intensive, globally ambitious start-ups?

There is much still in the UK’s favour – deep research institutions, strong technical talent, attractive R&D incentives (when managed on time), and robust IP frameworks. But the global environment is changing fast. US state incentives are more targeted; global capital is more mobile; founders are increasingly internationally fluent.

If the UK wishes to retain its role as a natural launchpad for innovation, then policy must keep pace.

Ensuring R&D incentives remain efficient, providing scale-up capital, avoiding friction for founder mobility, and strengthening the conditions that encourage businesses not only to start here are all essential – if they are to stay long enough to grow.

The contributors

References

• https://www.uktech.news/news/government-and-policy/startups-warn-chancellor-against-exit-tax-amid-budget-rumours-20251110
• https://www.aljazeera.com/news/2025/11/19/are-the-superrich-really-fleeing-the-uk-due-to-taxes