An update on the tax treatment of carried interest from April 2026
2 Sep 2025 • Business Services • Business Tax • Financial Services • Tax
As part of the 2025 Legislation Day, the government published its much-anticipated draft legislation detailing how the reform to the taxation of carried interest will be applied from 6 April 2026. Here, we summarise the key points within the draft legislation.
The government announced in last year’s Budget that from 6 April 2026, the tax regime for carried interest will be revised and all carried interest will instead be taxed within the income tax framework, treated as trading profits subject to Income Tax and Class 4 National Insurance Contributions (NIC).
Further details were announced in June 2025 by HM Treasury following the conclusion of their Call for Evidence and the draft legislation has now been published as part of this summer’s Legislation Day, which sets out how the rules will apply from April 2026.
The legislation, which includes the same definitions in respects of several aspects to the Disguised Investment Management Fees legislation, will form part of the Income Tax (Trading and Other Income) Act 2005 from April 2026.
The key details of the legislation are:
Taxation of carried interest as trading profits
From 6 April 2026, individuals will be treated as carrying on a trade in respect of all carried interest receipts (both capital and income) and be subject to income tax (up to 45%) and Class 4 NIC (2% over the upper profits limit).
Qualifying carried interest will benefit from a 72.5% multiplier, reducing the tax rate to 34.075%.
Average Holding Period
Carried interest will be “qualifying” where it meets the 40-month average holding period test, with tapering applied where the average holding period is between 36 and 40 months.
The exclusion for employment related securities from the average holding period will be removed.
Changes have been made to the average holding period conditions to ensure they operate fairly and reflect commercial realities. This applies to private credit funds that pursue long-term strategies, fund of funds and secondary funds.