Changes to the tax treatment of carried interest from 6 April 2026

As announced at Autumn Budget 2024, from 6 April 2026 the UK tax treatment of carried interest will change. The current system, which charges capital gains tax (CGT) on carried interest, will be replaced with rules that treat it as trading profit, subject to income tax and Class 4 National Insurance contributions (NICs).

Following a consultation on how the revised regime will operate, the government published its response and policy update on 5 June 2025. Draft legislation was then released on 21 July 2025 (Legislation Day or L-Day) for inclusion in Finance Bill 2025-26.

How carried interest is taxed under the current rules

Carried interest is a form of performance-related reward received by investment fund managers.

Since 6 April 2025, it has been taxed at 32% under the CGT regime (up from the previous 28%), provided it is not:

• Taxed as income under the employment-related securities (ERS) rules,
• Taxed as a management fee under the disguised investment management fee (DIMF) rules which includes the income-based carried interest (IBCI) requirements.

How carried interest will be taxed from April 2026

Based on the draft legislation, from 6 April 2026 all carried interest will be treated as trading profit and subject to income tax and Class 4 NICs. Where the carried interest is ‘qualifying’, only 72.5% of the total amount will be subject to tax and NI. This results in an effective tax rate of 34.075% (additional rate taxpayer including NIC). The tax rate is broadly in line with the current 32% CGT rate, so for many, the main difference will be the additional NICs.

Qualifying carried interest and the average holding period

For carried interest to be ‘qualifying’ and therefore for the 72.5% multiplier to apply, it must meet a number of conditions, including conditions relating to the average holding period. This requires a weighted average holding period of the investments of at least 40 months (with partial relief for periods of at least 36 months).

Notably currently there is an exclusion from carried interest being treated as IBCI where it is considered an ERS, but this exclusion will be removed. This change is likely to lead to more complex calculations being needed to confirm whether payments are qualifying.

DIMF and the ERS legislation will continue to apply as they do currently.

Specific rules will apply for different fund types.

Territorial scope of the revised carried interest regime

Non-UK residents will be subject to income tax on carried interest to the extent that their duties were carried out in the UK. However, in respect of qualifying carried interest, these UK workdays (days where more than three hours of work are undertaken from the UK on investment management services) can be excluded:

• Days before 30 October 2024 (when the changes were announced),
• Days in a ‘non-UK tax year’, and
• Days before a period of three consecutive non-UK tax years.

A ‘non-UK tax year’ is one where the investment manager is non-UK tax resident and they have fewer than 60 UK workdays.

These exclusions aim to prevent occasional UK workdays from triggering UK tax.

Double tax treaty considerations

Some jurisdictions are likely to continue to treat carried interest as capital gains, which could lead to double taxation. HMRC maintains that the UK has taxing rights for a non-UK resident under double tax treaties but there may be arguments that treaty relief should apply under the capital gains Article.

It is also worth noting that previously the attribution of the carried interest gain to the UK was calculated on a “just and reasonable” basis. This could therefore take into account the value of work undertaken at different points in a fund’s life cycle. For UK domestic purposes this will now become a strict day count apportionment, removing this flexibility.

Payments on account and cash flow

Under the current CGT regime, carried interest does not affect a person’s payments on account. Under the new rules, tax and NICs on carried interest will be relevant for calculating a person’s payments on account for the following year. Where there’s a large one-off tax liability it may be possible to reduce payments on account to help with cash flow. Care should be taken to avoid over reducing the payments, as this could lead to interest charges.

Temporary non-resident rules

People who realise carried interest under the current CGT rules but who stopped being UK tax resident in 2025-26 or earlier and who are not non-UK tax resident for five years or more may have carried interest taxed as trading income but with the 72.5% multiplier in the year of their return.

Proposed changes which are not going ahead

Based on responses to the consultation, including ours, the government has confirmed that its proposals to introduce a minimum co-investment and minimum time period will not be going ahead.

The draft legislation is subject to consultation and may change before it’s enacted.

How we can help

If you want to know more about how these changes will affect you, please contact us.