UK clarifies details of new income tax regime for carried interest from April 2026

Carried interest will be treated as trading profits and subject to income tax under new rules to be introduced from April 2026. The announcement was made in a policy update and response document to the government’s consultation on the qualifying conditions of the new regime published at the Autumn Budget 2024.

Under the new regime, all carried interest will be treated and taxed as trading income, at rates of up to 45% plus Class 4 national insurance contributions. Certain ‘qualifying carried interest’ will be subject to a lower effective rate of income tax – 34.1% for additional higher rate taxpayers, based on only 72.5% of it being subject to tax at the individual’s marginal rate of tax. The government had originally proposed that a minimum level of co-investment would be required for carried interest to qualify for the lower effective tax rate. This condition will now not be introduced, the policy update has confirmed. 

Peter Morley, a private equity tax expert at Pinsent Masons, said: “The update on the qualifying conditions will be welcomed by the private equity industry.”

“There was widespread concern that the minimum capital requirement would have made the UK less competitive than other jurisdictions. The requirement would also have been complex to administer and a barrier to entry to the industry at a time when progress is being made to attract diversity of talent,” he said.

There had been widespread concern that the proposed new regime would reduce the attractiveness of the UK’s fund regime and, consequently, adversely affect UK investment levels. Stakeholders across the funds industry engaged in significant lobbying with the government regarding the proposed conditions that would be introduced for carried interest to qualify for the lower effective tax rate.

“It is encouraging that the government has listened to the concerns put forward by the industry. Whilst we will need to wait for the draft legislation to be published to see all the details, the announcements remove a significant level of uncertainty which had been hanging over the industry and will enable funds to focus on making investments,” said Morley.

Carried interest refers to the performance-related rewards received by fund managers, primarily in the private equity industry. Unlike other rewards, carried interest can currently be taxed at lower capital gain tax rates, compared with income tax rates of up to 45%. The tax rate for carried interest was increased from 28% to 32% from 30 October 2024, pending the introduction of the new regime under the income tax framework. The government believes that the current tax regime does not accurately reflect the economic characteristics of carried interest or the risk assumed by fund managers and considers that the new regime will be simpler and fairer, ensuring that fund managers pay their fair share of tax.

The new rules will apply equally to employee and self-employed fund managers. The policy update also confirmed that a minimum holding period requirement would not be introduced as a condition for carried interest to qualify for the lower tax rate. This requirement had originally been proposed to ensure favourable tax treatment would not be available where carried interest is used as a short-term performance reward.

Morley said that it was “welcome” that the government had agreed not to introduce a minimum individual holding period, since “safeguards against short-termism already existed, making further conditions unnecessary”. These include an asset-level average holding period condition, which requires that the relevant fund holds its assets for at least 40 months, on average, to access preferential tax treatment in full.

The new rules will apply to UK carried interest – broadly, where investment management services are performed in the UK. Therefore, non-UK tax residents receiving UK carried interest as a reward for having performed UK investment management services will be caught by the new rules. However, it is proposed that non-UK tax residents will be able to spend up to 60 work days in the UK providing investment management services without falling within the new regime. Individuals will also fall outside the scope of the regime, three years after the end of the last tax year in which they were either UK tax resident or exceeded the new 60 workday threshold.

The new tax regime will apply from 30 October 2024 – the date of last year’s Autumn Budget. Draft legislation is expected to be published this summer for inclusion in the next Finance Bill.

“After years of speculation and talk of changes to the treatment of carried interest, it is to be hoped that once these changes are introduced that attention will move elsewhere. It would be very unhelpful if the chancellor revisited this during the Autumn Budget where tax rises are widely predicted,” said Morley.