The UK government has announced a significant reform to the taxation of carried interest, a form of performance-based remuneration commonly received by investment fund managers. This change, set to take effect from 6 April 2026, represents a fundamental shift in how such income will be taxed.
Under the new regime, carried interest will be taxed as trading profits under the Income Tax framework, rather than as Capital Gains Tax (CGT).
Why the reform is happening
This move is intended to better align the tax treatment of carried interest with its economic substance and the nature of the services provided.
Historically, carried interest has benefited from CGT treatment, often attracting lower tax rates than income. This has been a point of contention, particularly given that carried interest is earned in exchange for investment management services.
The reform seeks to address this disparity by introducing a bespoke Income Tax regime that reflects the long-term, performance-based nature of carried interest while ensuring a fairer distribution of tax liabilities.
How the new carried interest taxation will work
Under the new rules, carried interest will be subject to Income Tax and Class 4 National Insurance contributions (NICs). However, to mitigate the impact of this change, the legislation introduces a partial exclusion mechanism:
Where carried interest qualifies under the new framework, only 72.5% of the profits will be taxed as trading income.
This partial exclusion recognises the unique characteristics of carried interest - particularly its dependence on long-term investment performance - resulting in an effective tax rate of up to 34.075% for additional rate taxpayers in England.
Clearly, this is a hike from the 28% higher rate CGT (18% basic rate - but that was unusual) on carried interest for individuals that was in place prior to the 30th October 2024 Autumn Statement.
Qualification criteria
Qualification for this relief hinges on the average holding period (AHP) of the underlying investments.
To be considered 'qualifying carried interest', the AHP must exceed 40 months. This threshold ensures that the relief is targeted at genuine long-term investment rewards rather than short-term gains.
The legislation also provides for specific permitted deductions, allowing fund managers to offset certain expenses directly attributable to the generation of carried interest.
Who will be affected?
The territorial scope of the new regime is broad. It applies to both:
UK tax residents, and
non-residents who perform investment management services in the UK.
To prevent avoidance, individuals who spend 60 or more workdays in the UK during a tax year will be brought within the new regime. Importantly, a grandfathering provision excludes any time spent in the UK before 30 October 2024 from counting toward the 60-workday threshold. This proves some transitional relief.
The reform also interacts with existing rules on income-based carried interest (IBCI). Where carried interest falls within the employment-related securities regime, it will not be excluded from the IBCI rules, ensuring consistency across different forms of remuneration.
Wider implications
This reform will have wide-ranging implications for fund managers and investment firms.
It is likely to increase tax liabilities for many individuals who previously benefited from CGT treatment.
Moreover, the complexity of the new rules - particularly in calculating the AHP and determining qualifying status - will necessitate careful planning and potentially significant changes to remuneration structures.
As the Finance Bill 2025–26 progresses (draft legislation released 21 July 2025), firms should begin reviewing their carried interest arrangements and preparing for the new compliance requirements.
The reform reflects the current government’s idea of a modernised tax system which ensures that rewards for investment management are taxed in a manner that reflects their nature, and - let’s not be naïve - raises further Revenue for the Treasury to fund its extensive spending plans.
The next step
If you are affected by these changes or need help reviewing your carried interest arrangements, our tax team is here to support you through the transition. Please get in touch with Phil Kinzett-Evans or your usual UHY tax adviser for more information.
