The UK’s HM Treasury released its Government Response and Policy Update on 5 June 2025, addressing the tax treatment of carried interest following a consultation. 

The UK’s HM Treasury published its Government Response and Policy Update following the consultation on the tax treatment of carried interest on 5 June 2025. The document outlines the key policy decisions and confirms that draft legislation will be released for consultation ahead of the Finance Bill 2025–26.

The key highlights are as follows:

Revised tax regime

From April 2026, carried interest will fall under the Income Tax framework and be treated as trading profits. Where the carried interest is considered ‘qualifying’, a special multiplier of 72.5% will apply. These trading profits may also attract Class 4 National Insurance Contributions (NICs), resulting in an effective tax rate of 34.075% for additional rate taxpayers in England.

Tax prepayments

Under the revised tax rules, any income tax and National Insurance Contributions (NICs) paid on carried interest in the previous tax year will be considered when calculating payments on account. While the government acknowledges that carried interest can be inconsistent and difficult to predict, it does not intend to introduce any special measures to address this variability. It points out that similar challenges exist for other trading profits and that taxpayers already have the option to request a reduction or cancellation of payments on account to avoid paying excess tax.

Income-based carried interest:

From April 2026, carried interest classified as an employment-related security will fall within the scope of the IBCI rules. Under these rules, for carried interest to qualify, the underlying investments must generally be held for an Average Holding Period (AHP) exceeding 40 months. The government also intends to introduce targeted changes to the AHP condition to ensure the rules function effectively for private credit, secondaries, and fund of funds strategies.

Territorial extent of the revised rules

The updated tax rules extend UK taxation to carried interest arising from services carried out in the UK, while incorporating measures to help prevent double taxation. If an individual has not been a UK tax resident and has not worked in the UK for more than 60 days in each of the three full tax years prior to the current one, any UK services during the current year will be treated as non-UK services. Relevant double taxation agreements may also apply.