Venture capital investors have warned that higher taxes on financial services would have trickle-down effects and “clip the wings” of Britain’s already capital-starved fintech sector.
Start-up investors that fund the UK’s financial technology industry told City AM the sector’s struggles to access cash would be amplified by a tax hike on top banks and increases to capital gains.
“There’s going to be a bunch of indirect effects,” Sanchit Dhote, principal at Outward VC, which was an early stage investor in the likes of Primarybid and Firenze, said.
“It’s discouraging from a morale perspective.”
He added that banks could pull back from operations where they are an “obvious customer and partner for fintechs” and withdraw from their role as key venture debt providers, a specialised loan for high-growth start-ups.
One leading fintech VC executive said: “What investors want is certainty… if future projections are hindered by government intervention where tax rates will be changed, that creates a cloud that will impact their investment decisions.
“Why would you want to clip the wings of one of the greatest UK success stories?”
A cohort of top challenger banks wrote to the Chancellor last month calling for the threshold on the banking surcharge – a three per cent levy which sits on top of corporation tax – to be raised to give firms further breathing room before they face an additional tax grab. The Chancellor John Healey is widely expected to lift the charge on banks at his maiden Budget later this month.
The chief executives of Revolut UK, Monzo and Oaknorth were among the signatories that called for the threshold to be hiked to £500m of group profit, up from its current £100m.
The fintech investor said there was “no upside” for digital banks even if the calls were heeded.
“A moving target on future taxation will inevitably impact valuation sentiment,” they added.
UK fintech ‘scraping the barrel’
Another top fintech VC, which has deployed capital to over 200 firms including a dozen unicorns, said: “We literally need all the help we can get… we need to encourage overseas capital.”
Total investment in UK fintech fell to £1.8bn in the first half of the year, down two-thirds from the same period in 2025. It marked a decade-low, despite the UK retaining its top spot in Europe.
An executive at one UK fintech unicorn told City AM firms were “scraping the barrel” with investment in the UK.
Deal count also fell to its lowest level in a decade in the first half at 205.
“The depth of the investor pools in Europe has reduced… it’s more shallow than it used to be,” one fintech deals banker told City AM.
They pointed to a lack of “specialist investors in fintech” while many of the generalists have “reduced this pocket to reallocate to AI”.
Hannah Dobson, head of UK fintech at KPMG, said: “Heavier tax burdens would kick UK fintech while it’s down… taxation is one part of a much bigger competitive picture and can’t be viewed in isolation when it comes to the UK’s investability”.
The government has ruled out equalising capital gains with income tax – a move supported by many of the cabinet – but have left the door open to changes to the overall regime.
Meanwhile, the country’s largest banks are expected to be targeted for a cash raid by Chancellor John Healey when he delivers his Budget on 28 October.
Many in the City are expecting the banking surcharge to be hiked to as much as eight per cent, reversing a cut by former Chancellor Jeremy Hunt in 2022.
While the tax hike would not directly hit the balance sheet of many of the nation’s fastest growing fintechs, Dobson argued the “cumulative tax burden” on financial services would still hit investor appetite.
“With financial centres around the world vying for investment, differences in tax regimes, regulation and access to capital and talent all influence where businesses choose to invest and grow,” she said.
A Treasury spokesperson said: “As has always been the case, decisions on tax are a matter for the Chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”