Carried interest tax reform

The UK's revised carried interest regime, effective 6 April 2026, moves carried interest wholly within the income tax framework. According to the publication's analysis, all carried interest is now deemed trading profit subject to income tax at a 45% marginal rate and Class 4 National Insurance Contributions at 2% on profits above the Upper Profits Limit. Carry that qualifies, based on an Average Holding Period of at least 40 months, is subject to a 72.5% multiplier, producing an effective rate of 34.075% for an additional rate taxpayer. Funds with an AHP between 36 and 40 months may have a proportion of their carry qualify. Non-qualifying carry is taxed fully as income and NICs, producing an effective rate of 47%.

The AHP test replaces the IBCI regime and is more demanding in several respects. It applies equally to employees and non-employees, including LLP members, and the Employment-Related Securities exemption has not been maintained. Where carry is calculated on a deal-by-deal basis or through single-asset co-investment or continuation vehicles, the test may be applied to that single asset alone, making it harder to satisfy. Traditional private equity funds investing in trading businesses with medium to long-term holding periods should generally qualify, while debt strategies, continuation funds and evergreen structures may find the conditions more challenging. Targeted adaptations have been made for credit funds and funds of funds. The publication recommends that fund managers review investment periods for existing and new funds and establish robust monitoring processes.

The rules also apply to a broader range of structures. The DIMF and carried interest regimes now cover arrangements involving collective investment schemes and alternative investment funds, and no longer require a partnership. Anti-avoidance provisions are broadly drafted. Where carry is held by family members or through vehicles such as family investment companies or trusts, general tax principles apply, and the publication states that an unrelieved double tax charge would not generally be expected where positions are correctly analysed and reported to HMRC.

Because carry is now trading income, it falls within the payments on account regime, which has significant cash flow implications for executives who were previously largely outside it. Using an illustrative £250,000 of qualifying carry received in 2026/27, the balancing payment would be £85,187.50 due 31 January 2028, with a first payment on account of £42,593.75 for 2027/28 and a second of the same amount due 31 July 2028. HMRC charges late payment interest at 4% above the Bank of England base rate. Making Tax Digital for Income Tax will also apply to carry, with the corresponding return due by 31 January 2028 and MTDfIT applying from 6 April 2028 at the earliest. Relief for other UK taxes is now provided through an adjustment to taxable carry rather than a tax credit, and unilateral relief for foreign capital gains tax is provided.