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Starting 6 April 2026, the UK’s tax treatment of carried interest—a key reward for fund managers—is undergoing a dramatic overhaul. What was once subject to capital gains tax will now fall under income tax and National Insurance rules, aligning with how other trading profits are taxed.
If you’re part of the investment management sector, here’s what you need to know about the new rules and how they could affect your compensation, planning, and compliance.
Current vs. Future Tax Treatment: What’s Changing?
- Until 5 April 2026: Carried interest is taxed under capital gains rules at 32%.
- From 6 April 2026: It will be treated as trading income, subject to income tax (up to 45%) and Class 4 NICs—increasing the overall tax burden, especially for UK-based individuals.
Relief for “Qualifying” Carried Interest
To ease the transition, a reduced tax base applies to qualifying carried interest. Only 72.5% of the amount is subject to tax and NICs, leading to an effective rate of around 34.1% for additional rate taxpayers. This means while the formal rules change, the effective tax rate remains roughly in line with the current CGT rate—though NICs are now in play.
To qualify for the relief, the carried interest must meet several conditions—most importantly, a weighted average holding period of at least 40 months. A partial relief is available for holding periods of at least 36 months.
Key Implications for Fund Managers
1. Income Treatment Is Broader: Even previously excluded types of carried interest (e.g., under employment-related securities) will now be treated as income. Expect a broader range of payments to fall under the new tax regime.
2. NICs Impact Cash Flow: In addition to income tax, individuals will owe Class 4 National Insurance, which wasn’t applicable under CGT rules. This will have a tangible cash flow impact.
3. Payments on Account Will Be Affected: Unlike CGT, carried interest taxed as income will factor into your payments on account for the next tax year. You’ll need to manage these to avoid interest charges or underpayments carefully.
UK Residency and Workday Rules
For non-UK residents, only carried interest earned from UK-based workdays will be subject to UK tax. However, if you’ve had fewer than 60 UK workdays in a tax year, or the days were before 30 October 2024, those days may be excluded—offering protection for globally mobile fund managers.
Returning UK residents who left before 2025–26 but return within five years may still see carried interest taxed as income, though they’ll benefit from the 72.5% multiplier.
Looking Ahead: What to Do Now
With less than a year before implementation:
- Review carried interest structures with legal and tax advisers.
- Model future liabilities, especially if your current schemes were structured for CGT.
- Prepare for more scrutiny around holding periods and fund lifecycles.
- Adjust cash flow planning to account for higher upfront tax payments.
The carried interest tax reform significantly changes how performance-based rewards are taxed in the UK, shifting from lower-rate capital gains to higher-rate ordinary income. While many may notice little change in their tax rate, the new classification introduces increased cash flow considerations and compliance challenges for fund managers and advisors. With the April 2026 deadline approaching, stakeholders must adapt proactively to avoid financial inefficiencies and penalties. Careful planning and restructuring are essential to navigate these new regulations and seize potential opportunities.