The UK is to raise taxes on performance fees, or “carried interest,” for private equity fund managers from 28% to 32%, effective April 2025 — a smaller increase than many in the industry had anticipated, according to a report by Reuters.
In her budget announcement, UK finance minister Rachel Reeves outlined the tax hike as part of broader capital gains tax increases affecting most asset classes. Additionally, starting in April 2026, carried interest will be taxed under the income tax framework, according to government budget documents.
Carried interest, a performance-based fee structure, is paid by around 3,100 individuals in the UK but has created significant wealth within the private equity sector. Reeves had previously indicated an intent to close a tax loophole that lets private equity executives pay a reduced 28% tax rate on these gains, hinting at a potential alignment with the top income tax rate of 45%.
The 2026 reforms will also subject carried interest to national insurance contributions, which Michael Graham, a partner at DLA Piper, noted would result in an effective tax rate of 34.625%.
Other potential changes under consideration include co-investment requirements and extending minimum holding periods, though these would be open to public consultation.
The private equity sector, which lobbied heavily against larger tax increases, argues that private investment is critical for the UK economy and warns that higher taxes could push wealthy managers to move abroad. Michael Moore, CEO of the British Private Equity and Venture Capital Association (BVCA), welcomed the government’s measured approach, saying it reflects “the value of the private capital industry.”
However, critics argue that performance-based earnings should be taxed as income, as they are compensation for services rather than capital gains. The government defended its approach, citing the “unique characteristics” of carried interest compared to standard income. Similar lobbying efforts by private equity against carried interest tax hikes have succeeded in other countries, including the United States.