The taxation of carried interest: inside the small print of the UK budget
The UK’s new Labour government today announced its long-awaited autumn budget. As expected, financial services professionals with carried interest are going to be squeezed.
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The headline figure is that Capital Gains Tax (CGT) on carried interest is rising to 32% from 28%. The full autumn budget document however, hid something perhaps more concerning to those enjoying their tax break.
The document says that from April 2026 “carried interest will be taxed fully within the Income Tax framework.” However, there will be “bespoke rules” to reflect “its unique characteristics.”
Those bespoke rules are further tax breaks. Although “all” carried interest will be taxed like income, the small print says there will be “a 72.5% multiplier applied to qualifying carried interest that is brought within charge”. The real tax rate will 72% of the UK's highest marginal tax rate of 45% on incomes over £125k ($163k). The “final” tax rate on carried interest will, therefore, will be just 33.75%. Not bad, all things considered.
There are around 3,100 professionals in the UK that earn carried interest, the majority of them in private equity, divvying up a pot of approximately £3.7bn between them, according to the Centre for the Analysis of Taxation (CenTax).
The vast majority of carried interest is earned by just a small handful of those 3,000 individuals – according to CenTax, the top 30 individuals earned a quarter of all the UK’s carry between them, with an average pay out of £33m ($43m). The top 100 earn almost half of it, or £18m ($23m) each.
As the tax rate rises those highest earners will pay an additional £1.9m ($2.4m) and £1.0m ($1.3m) in tax, respectively.
The budget document also notes that it doesn’t expect the change in the taxation of carried interest to bring in any revenue for the treasury until the 2027-28 tax season – in fact, it’ll cost the taxpayer until then.
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