TRW & Co · UK tax
Carried Interest Tax Reform: The New UK Regime
The carried interest tax UK managers pay changed on 6 April 2026. Carry is now treated as trading profits and charged to income tax and Class 4 NICs. Qualifying carry, from funds with a long enough average holding period, is charged on 72.5% of its amount, and non-residents can be taxed on carry linked to UK workdays.
Key pointQualifying status is measured by the fund’s average holding period when the carry arises, so exit timing can now change how much of the deal team’s carry gets the 72.5% multiplier.
At a glance
Income tax regime
From 6 April 2026, carried interest is treated as profits of a deemed trade, subject to income tax and Class 4 National Insurance contributions rather than capital gains tax.
72.5% multiplier
Only 72.5% of qualifying carried interest, less permitted deductions, is treated as trading profit, reducing the effective rate compared with ordinary trading income.
40-month holding test
Carry is fully qualifying where the fund’s average holding period is 40 months or more, and not qualifying where it is under 36 months.
32% CGT in 2025-26
As an interim step, carried interest gains arising in 2025-26 were taxed at a single capital gains tax rate of 32%.
UK workdays matter
Non-residents can be taxed on carry linked to UK workdays, defined as days with more than three hours of investment management work in the UK.
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The short answer: how carried interest is taxed from April 2026
From 6 April 2026, the carried interest tax UK fund managers pay sits wholly within income tax. Under the Finance Act 2026, an individual who performs investment management services and receives carried interest is treated as carrying on a trade. The carry is treated as the profits of that trade, and is subject to income tax and Class 4 National Insurance contributions.
Carry that is “qualifying” is brought into charge at only 72.5% of its amount. Whether carry qualifies depends on the average holding period of the fund’s investments. Carry from a fund with an average holding period of 40 months or more is fully qualifying, while carry from a fund below 36 months is not qualifying at all. For an additional rate taxpayer, the 72.5% multiplier produces a materially lower effective rate than ordinary trading income, but higher than the old capital gains treatment.
The new rules replace the capital gains regime, under which carried interest gains were taxed at 28% until April 2025 and 32% for 2025-26. Because the trade is treated as carried on where the work is done, the rules also reach some non-residents who performed investment management services in the UK.
From capital gains to income tax: how the regime changed
Until April 2025, carried interest was generally taxed as a chargeable gain at special higher CGT rates of 18% and 28%. Rules on disguised investment management fees and income-based carried interest already recharacterised some returns as income. The Finance Act 2025 increased the CGT rate on carried interest gains to a single 32% for 2025-26, as an interim step, according to HMRC’s capital gains tax rates guidance.
The policy paper on the reform explains that the government wanted a regime that reflects the economic characteristics of carry while protecting the UK’s position as an asset management hub. The result, enacted by section 58 of the Finance Act 2026, inserts new provisions into the Income Tax (Trading and Other Income) Act 2005, with definitions in a new Schedule A1 to that Act.
| Period | Tax | Rate or basis |
|---|---|---|
| To 29 October 2024 | Capital gains tax | 18% or 28% on carried interest gains |
| 30 October 2024 to 5 April 2025 | Capital gains tax | 18% or 28% on carried interest gains (main CGT rates rose to 18% and 24%) |
| 6 April 2025 to 5 April 2026 | Capital gains tax | 32% on carried interest gains |
| From 6 April 2026 | Income tax and Class 4 NICs | Treated as trading profits; qualifying carry brought into charge at 72.5% |
How the carried interest tax UK charge is computed
The computation starts with the total carried interest arising to the individual in the tax year under the relevant arrangements. That total is split into qualifying and non-qualifying carry. Permitted deductions are then allocated between the two in proportion, and these broadly reflect consideration the individual gave for the carry entitlement. The 72.5% multiplier is applied to the qualifying portion only. No other deductions are allowed against the deemed trade, so ordinary trading expenses cannot be claimed.
Several further rules shape the result:
- Sums arising to other persons. Part 2 of Schedule A1 sets out circumstances in which carry arising to another person, such as a connected entity, is treated as arising to the individual. Carry cannot be taken out of scope simply by routing it through another vehicle.
- Election for earlier arising. Part 4 of Schedule A1 allows an election to treat carried interest as arising at an earlier time. This may be relevant where the timing of the UK charge would otherwise differ from the timing of tax charged elsewhere.
- Territorial split. Where the deemed trade is carried on partly in the UK, only the UK proportion, based on workdays, is charged on a non-resident, subject to the disregards described below.
Because the carried interest tax UK charge now follows trading income rules, it is reported through Self Assessment and feeds into payments on account. Executives who previously reported carry as capital gains should expect their returns, and their cash flow, to look different from 2026-27.
Who the carried interest tax UK changes affect
The new rules affect any individual who performs investment management services for an investment scheme and receives carried interest. That covers private equity, venture capital, infrastructure, real estate and private credit managers, whether they are partners in an LLP, employees of a management company or founders of a new manager.
Long-hold buyout and infrastructure strategies are likely to have mostly qualifying carry. Shorter-hold strategies may find much of their carry taxed at full income tax rates. Emerging managers should consider the rules when designing fund terms, because investment pace and exit policy now affect the team’s personal tax. Non-resident executives who travel to London for investment committees, portfolio meetings or fundraising should check whether their UK workdays bring carry into charge.
What makes carry “qualifying”
The 72.5% multiplier only applies to qualifying carried interest. Part 3 of the new Schedule A1 ties qualifying status to the average holding period of the investment scheme, measured when the carry arises. The relevant proportion of carry that is qualifying is 0% for an average holding period of less than 36 months. It then rises in steps for each additional month, reaching 100% at 40 months or more.
The detailed rules in Schedule 11 to the Finance Act 2026 cover how investments are identified, how disposals and part-disposals are counted, and how derivatives and hedging are treated. There are special rules for particular fund strategies, such as debt funds, where the treatment of holding periods is modified and capped. Some strategies can rely on expected holding periods where it is reasonable to assume that most of the value invested will be held for 40 months or more.
What counts as carried interest
Not every return to a manager is carried interest. Under Schedule A1, a sum is only carried interest if it reflects genuine performance risk. Where there was no significant risk that a minimum amount would arise, that minimum is excluded. Arm’s-length returns on the manager’s own co-investment are not carry. Sums already taxed as employment income or under the employment-related securities rules are also outside these provisions, so the employment tax analysis still matters.
Non-resident fund managers and UK workdays
The policy paper confirms that the regime applies where the individual is UK resident or where the carried interest relates to investment management services performed in the UK. The new section 23K of the Income Tax (Trading and Other Income) Act 2005 treats the deemed trade as carried on in the UK according to the proportion of “applicable workdays” that are UK workdays.
A UK workday is a day on which the individual spends more than three hours performing investment management services in the UK. For non-residents, some UK workdays are disregarded when calculating the UK share of qualifying profits:
- UK workdays before 30 October 2024;
- UK workdays in a “non-UK tax year”, meaning a year in which the individual is non-UK resident and has fewer than 60 UK workdays; and
- UK workdays before a period of three or more non-UK tax years.
Whether a non-resident manager actually pays UK tax also depends on any applicable double tax treaty and on the claims made, so treaty analysis should be done before relying on any exposure. The rules also treat carry as taxable on return where a manager is only temporarily non-resident.
For new arrivals, carry linked to work done abroad before they became UK resident may benefit from the four-year regime for new residents. Our guide to non-dom tax changes explains who qualifies.
Practical steps for managers and fund sponsors
- Map every carry entitlement. List each fund, vintage and entitlement, the vehicle through which carry is held, and when distributions are expected. Note which arrangements predate 30 October 2024.
- Test average holding periods. Work with the fund’s finance team to model each fund’s average holding period under Schedule A1, including the treatment of follow-on investments, part-disposals and hedging.
- Check the employment tax analysis. Confirm that carry is not already taxable as earnings or under the employment-related securities rules. Review the terms on which the carry was acquired and whether any elections were made.
- Record workdays. Keep a contemporaneous log of UK and non-UK workdays, including hours. For globally mobile teams, this is now a core compliance record rather than an administrative detail.
- Revisit fund and LPA terms. Consider whether tax distributions, reporting and information covenants in fund documents give executives the data they need to compute their liability.
- Plan Self Assessment. Carry is now trading income, so payments on account, Class 4 NICs and the basis of computation need to be built into personal tax planning.
The average holding period is calculated when the carry arises, not when the fund is launched. A fund that sells its best assets early may find that its carry is only partly qualifying, so exit timing decisions can now have a direct personal tax cost for the deal team.
Illustrative scenario: the carried interest tax UK managers face on an exit
Illustrative only; generic parties; simplified and not a calculation of any real liability. A UK-resident partner in a London buyout manager receives carry in the 2026-27 tax year from a fund whose average holding period, measured when the carry arises, is above 40 months. The carry is fully qualifying, so 72.5% of it, less any permitted deductions, is treated as trading profit and charged to income tax and Class 4 NICs at her marginal rates.
A colleague who moved to Dubai several years ago receives carry from the same fund. He spent some UK workdays on the fund before leaving. Those days before 30 October 2024 are disregarded for the qualifying profits, as are days before a period of three or more non-UK tax years. His UK exposure on that carry may therefore be limited, subject to the treaty position.
A third executive receives carry from a credit fund with a short average holding period. Only part of her carry, or none of it, is qualifying, so most of it is taxed in full as trading income. The same exit produces three different carried interest tax UK outcomes.
Risks and common mistakes
Assuming all carry gets the 72.5% multiplier
The multiplier applies only to qualifying carried interest, and qualifying status depends on the fund’s average holding period when the carry arises. Funds with a shorter holding period, including many credit, secondaries and some growth strategies, may have little or no qualifying carry. Managers should model the holding period for each fund rather than assuming the reduced charge, and should revisit the model when exit plans change.
Poor workday records for mobile staff
The UK share of a non-resident’s deemed trade, and the disregards for non-UK years, depend on counting UK workdays and the hours spent working in the UK. Without contemporaneous records, it is difficult to defend a position if HMRC enquires. Calendar entries, travel records and deal logs should be kept in a form that can be produced later. The 60-day threshold for a non-UK tax year makes accurate counting particularly important.
Treating carry as outside the employment tax rules
Carry that is taxable as employment income or under the employment-related securities rules falls outside the new trading regime. If the carry was acquired at an undervalue, or on terms that look like remuneration, the employment tax analysis can produce a very different result. Founders and fund sponsors should review how carry was granted, the valuation at grant and any elections, especially for executives who joined after a fund launched.
Ignoring Class 4 NICs and payments on account
Because carry is now treated as trading profits, it is subject to Class 4 National Insurance contributions and to the normal Self Assessment payment cycle, including payments on account. A large carry receipt in one year can increase payments on account for the following year, creating cash-flow pressure if later receipts are lumpy. Plan with your tax adviser to apply to reduce payments on account where appropriate.
Cross-border angle: the UK, the Gulf and Asia
International managers often have teams spread across London, the Gulf, Singapore and other centres. The new workday-based approach means that where people work now matters as much as where they live. Managers should align secondments, deal team staffing and investment committee arrangements with their intended tax position, and record those decisions.
For fund sponsors with investors or portfolio companies in Bangladesh and South Asia, the carry rules interact with fund structuring and local withholding taxes. Our fund formation lawyers and asset management team advise on fund terms, while the AIFM regime reform guide covers the regulatory side.
What to do next: checklist
- Confirm which carry entitlements will pay out from 2026-27 onwards and under which fund terms.
- Model the average holding period for each fund and the qualifying proportion of carry.
- Review employment tax treatment and any elections for each executive.
- Introduce or tighten workday logging for internationally mobile staff.
- Check double tax treaty positions for non-resident team members before distributions.
- Build Class 4 NICs and payments on account into personal cash-flow planning.
TRW & Co’s London office is authorised and regulated by the Solicitors Regulation Authority. We advise managers, executives and sponsors on the carried interest tax UK rules alongside our tax lawyers in London and private equity team. To discuss your position, contact our London team at info@trw.co or +880 1779 127165.
Frequently asked questions
01How is carried interest taxed in the UK from April 2026?
From 6 April 2026, an individual who performs investment management services and receives carried interest is treated as carrying on a trade, with the carry treated as the profits of that trade. It is subject to income tax and Class 4 National Insurance contributions. Qualifying carry is brought into charge at 72.5% of its amount, less permitted deductions. The rules are in section 58 of and Schedule 11 to the Finance Act 2026.
02What is qualifying carried interest?
Qualifying carried interest is carry that benefits from the 72.5% multiplier. The qualifying proportion depends on the average holding period of the fund’s investments when the carry arises. It is nil below 36 months, rises in monthly steps between 36 and 40 months, and is 100% at 40 months or more. Special rules apply to particular strategies, such as debt funds, and to derivatives and hedging.
03What was the CGT rate on carried interest in 2025-26?
For the 2025-26 tax year, carried interest gains accruing to individuals were charged to capital gains tax at a single rate of 32%, as set out in the Finance Act 2025 and HMRC’s capital gains tax rates guidance. Before that, carried interest gains were taxed at 18% or 28%. From 6 April 2026, the capital gains treatment was replaced by the income tax regime.
04Are non-resident fund managers taxed on UK carry?
They can be. The regime applies where the carry relates to investment management services performed in the UK, apportioned by reference to UK workdays, meaning days with more than three hours of such work in the UK. For non-residents, workdays before 30 October 2024, days in a year with fewer than 60 UK workdays, and days before three or more non-UK tax years are disregarded for qualifying profits. Treaty relief may also be relevant.
05Does National Insurance apply to carried interest?
Yes. Under the new regime, carried interest is treated as trading profits and, according to HMRC’s policy paper, is subject to income tax and Class 4 National Insurance contributions. Executives should build this into their personal tax planning, along with the Self Assessment payment cycle and payments on account, which can be significantly affected by a large carry receipt in a single year.
Sources and official materials
- Reform of the tax treatment of carried interest — HMRC policy paper and tax information and impact note
- Finance Act 2026, section 58 — Deemed trade, 72.5% multiplier and UK workday rules
- Finance Act 2026, Schedule 11 — Definition of carried interest and average holding period
- Capital Gains Tax rates and allowances — Historic CGT rates on carried interest gains
- Finance Act 2025 — Interim 32% rate on carried interest gains
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.