LONDON, July 30, 2025 — Get ready for a tax shake-up for investment fund managers. Starting April 6, 2026, the way “carried interest” is taxed in the U.K. is changing significantly. Forget capital gains tax; it’s shifting to income tax and National Insurance contributions.
This tax reform impacts how investment fund managers are compensated.
- Carried interest, a performance reward for fund managers, will be taxed as trading profit from April 6, 2026.
- This means it will be subject to income tax and Class 4 National Insurance contributions (NICs).
- Qualifying carried interest will see 72.5% of its value taxed, leading to an effective rate of 34.075% for additional rate taxpayers.
- Key changes include the removal of an exclusion for employment-related securities (ERS) from income-based carried interest rules.
- Non-UK residents will face UK income tax on carried interest if their duties were performed in the UK, with specific workday exclusions.
The government released its response and policy update on June 5, 2025, following a consultation on the revised tax treatment. Draft legislation was then published on July 21, 2025, setting the stage for these new rules to be included in the Finance Bill 2025-26.
Current Tax Landscape
Carried interest, a performance-related reward for investment fund managers, has been taxed under the capital gains tax (CGT) regime. As of April 6, 2025, the rate increased to 32%, up from 28%. However, this tax treatment doesn’t apply if the carried interest is already taxed as income under employment-related securities (ERS) rules or as a management fee under disguised investment management fee (DIMF) rules, which encompass income-based carried interest (IBCI) requirements.
The New Regime: April 2026 Onward
From April 6, 2026, all carried interest will be treated as trading profit. This means it will be subject to income tax and Class 4 NICs. For “qualifying” carried interest, only 72.5% of the total amount will be taxed. This translates to an effective tax rate of 34.075% for an additional rate taxpayer, including NICs. While the overall rate is similar to the current 32% CGT, the addition of NICs is a key difference for many.
What Makes Carried Interest ‘Qualifying’?
To benefit from the 72.5% multiplier, carried interest must meet several conditions. A crucial one is the average holding period for investments, which needs to be at least 40 months. Partial relief is available for periods of at least 36 months.
A notable shift is the removal of the current exclusion from IBCI rules for carried interest that is considered ERS. This change is expected to introduce more complexity in determining whether payments qualify for the reduced tax treatment. The DIMF and ERS legislation will continue to apply as they do now, with specific rules tailored for different fund types.
Impact on Non-UK Residents
Non-U.K. residents earning carried interest will be subject to U.K. income tax if their work duties were performed in the U.K. However, certain U.K. workdays can be excluded for qualifying carried interest. These exclusions include days before October 30, 2024 (the announcement date of the changes), days within a “non-U.K. tax year,” and days preceding a period of three consecutive non-U.K. tax years. A non-U.K. tax year is defined as one where the investment manager is a non-U.K. tax resident and has fewer than 60 U.K. workdays. These provisions aim to prevent incidental U.K. workdays from triggering U.K. tax obligations.
Navigating Double Taxation and Apportionment
Some countries may continue to classify carried interest as capital gains, potentially leading to double taxation. While the U.K.’s tax authority asserts its right to tax non-U.K. residents under double tax treaties, there’s a possibility of treaty relief being claimed under capital gains articles. Previously, attributing carried interest gains to the U.K. was based on a “just and reasonable” calculation, allowing flexibility for work value at different fund life stages. However, for domestic U.K. tax purposes, this will now be a strict day-count apportionment, reducing flexibility.
Cash Flow and Payments on Account
Under the current CGT system, carried interest doesn’t influence a taxpayer’s payments on account. However, the new rules mean that tax and NICs on carried interest will affect these calculations. Individuals facing a large one-off tax liability might be able to reduce their payments on account to manage cash flow. Caution is advised, as over-reduction could result in interest charges.
Temporary Non-Residents
For individuals who realized carried interest under current CGT rules but ceased U.K. tax residency in 2025-26 or earlier, and do not remain non-U.K. tax resident for five consecutive years, their carried interest may be taxed as trading income upon their return. This could involve the 72.5% multiplier being applied in the year of their return.
Revisions to Proposed Changes
Based on feedback, including from industry professionals, the government has confirmed that its proposals for a minimum co-investment and a minimum time period for carried interest will not proceed.
It’s important to note that the draft legislation is subject to consultation and may be amended before it becomes law.
Need More Clarity?
If you’re seeking to understand how these forthcoming changes might impact your specific financial situation, seeking professional advice is recommended.
