At the Autumn Budget 2024, the government announced that it would bring forward legislation in the Finance Bill 2025-26 to change the tax treatment of carried interest. Currently, carried interest is typically subject to capital gains tax at a flat rate of 32%. From April 2026, carried interest will be subject to income tax and class 4 national insurance contributions (NICs). The taxable amount will be adjusted by applying a multiplier of 72.5% where the carried interest is “qualifying” carried interest.  

Update on qualifying conditions 

Alongside the Autumn Budget, the government published a consultation on the design of the new rules, including the conditions for carried interest to be treated as qualifying. Responding to the consultation, ICAEW questioned the need for the proposed minimum co-investment and minimum holding period requirements, believing that they would add complexity and risk affecting the UK’s attractiveness as a place to live, work and invest in the private equity (PE) sector. 

In a policy update published on 5 June 2025, the government has announced that it will not go ahead with the minimum co-investment or the minimum holding period requirements.  

Other developments 

In addition, the government has confirmed that it will: 

• Make some technical amendments to the existing average holding period (AHP) condition (currently referred to as the income-based carried interest rules), to accommodate specific types of funds, such as credit funds. The government says that the changes are designed to improve the operation of the AHP condition “without undermining the core purpose of the rules, which is to exclude funds which do not carry on a long-term investment strategy”.
• Introduce statutory limitations on the territorial scope of the revised regime. The government says that, as a consequence of the limitations, qualifying carried interest which arises to a non-UK resident will only be subject to UK tax where it relates to services performed in the UK and all of the following apply:
  • the UK services were performed within the previous three tax years;
  • the UK services were performed in a tax year in which the individual was UK tax resident or met a new threshold of 60 workdays in the UK in a relevant tax year; and
  • where there is an applicable double taxation agreement, the UK services are attributable to a UK permanent establishment of the relevant individual.

Where qualifying carried interest arises to a non-resident, transitional rules will treat any services performed in the UK prior to 30 October 2024 as being non-UK services. The government will also introduce a time-based apportionment method for allocating carried interest between UK and non-UK investment management services. 

Interaction with payments on account 

The policy update also explains the position with regards to payments on account of income tax and class 4 NICs. Under the revised regime, income tax and class 4 NICs paid in the previous tax year on carried interest will be relevant to the calculation of any payments on account due. Although the government recognises that carried interest receipts can be irregular and unpredictable, it points out that there is an existing mechanism for taxpayers to make a claim to reduce or cancel payments on account to avoid overpayments of tax. 

Next steps 

The government says that it will publish draft legislation for the revised tax regime before the summer recess begins on 21 July 2025, and that it will continue to meet with stakeholders to gather feedback.