UK’s Carried Interest Tax Hike and More Changes Proposed for Fund Managers in 2026

Background

The Chancellor of the Exchequer, Rachel Reeves, delivered her first Budget Statement on 30 October. The Autumn Budget drew widespread attention, with several measures grabbing the headlines, including the historic fact that it was the first Budget Statement delivered by a female Chancellor in the United Kingdom, and the increase of Employer’s National Insurance Contribution (social security tax) from 13.5% to 15%. 

Almost as an afterthought, the Chancellor also made the following announcement:

“The fund management industry provides a vital contribution to our economy, but as our Manifesto set out, there needs to be a fairer approach to the way carried interest is taxed. So we will increase the capital gains rates on carried interest to 32% from April 2025 and from April 2026 we will deliver further reform to ensure the specific rules for carried interest are simpler, fairer, and better targeted.”

The increase in the tax rate on carried interest from 28% to 32% from April 2025 is a stepping stone to the wider reform which The Government intends to introduce from April 2026. To coincide with the Budget, The Government published a paper entitled “The Tax Treatment of Carried Interest: Call for Evidence – Summary of Responses and Next Steps”. This document summarises the responses to HM Revenue & Customs’ call for evidence on carried interest and more importantly sets out The Government’s proposals for reform. The proposals are summarised below. We expect these proposals to be extended, refined, and perhaps amended before April 2026, as there are some technical points which remain the subject of consultation.

The Proposals

The policy objective of The Government is:

“…to introduce a revised tax regime for carried interest which will ensure that the reward is taxed in line with its economic characteristics, put the tax treatment of carried interest on a fairer and more stable footing for the long term and safeguard the strength of the UK as an asset management hub.”

To achieve this objective, The Government will introduce a revised tax regime for carried interest which will sit within the income tax (as opposed to capital gains tax) legislative framework. The key features of The Government’s proposal are as follows:

• A new concept of “Qualified Carried Interest” will be introduced. The qualifying conditions for carried interest to fall within this definition are yet to be determined and will be the subject of consultation/discussions with interested parties. Carried interest which falls within the Income Based Carried Interest rules, however, cannot be Qualified Carried Interest (see below).
• Qualified Carried Interest will be treated as trading profits and will be subject to income tax and national insurance contribution. The taxable trading profits will however be adjusted by applying a 72.5% multiplier, so that only that proportion will be taxed as trading profits. This will give the individual taxpayer an effective rate of tax (income tax and national insurance contribution) of 34.1%. This, according to The Government, is to “recognise the unique characteristics of the award.”
• The tax paid on the receipt of Qualified Carried Interest will be an exclusive charge (no additional capital gains tax, dividend tax or income tax), which should simplify the individual’s tax affairs as there will no longer be the need to determine the nature of the sums received.
• Co-investment returns will not be caught by this new regime.
• Non-UK residents will be subject to tax under this new regime on carried interest to the extent that it relates to services performed in the UK (subject to the terms of any applicable double tax agreement).
• The Income Based Carried Interest rules will be retained but amended to remove the exclusion for employment related securities so that the rule will apply equally to employees and self-employed fund managers. Income Based Carried Interest will continue to be subject to income tax, but without the benefit of the 72.5% multiplier.

What Next?

The consultation on the Qualifying Carried Interest conditions closes on 31 January 2025, following which The Government will most likely publish its revised proposals and draft legislation.