The Autumn Budget saw an increase to the capital gains tax rate on carried interest from 6 April 2025, and a complete reform in how all carried interest will be taxed from 6 April 2026. Here, we summarise the changes announced and what further changes to expect.

In July, the Labour government announced that they were committed to reforming the tax treatment of carried interest.

As we covered earlier this year, the government launched a Consultation on the taxation of carried interest over the summer, with the findings leading to a two-stage reform that was announced in Rachel Reeves’ eagerly anticipated first Budget as Chancellor.

Although the changes were not as bad as some had feared, they will fundamentally impact the tax treatment of carried interest.

Key changes announced

• From 6 April 2025, the tax rate on carried interest qualifying for capital gains treatment will rise to 32% (currently 18% for gains within a taxpayer’s unused basic rate band and 28% for all other taxpayers).

• From 6 April 2026, all carried interest (both capital and income) will be taxed as deemed trading income and be subject to income tax and Class 4 National Insurance Contributions (at rates of up to 47%). However, qualifying carried interest will benefit from a 72.5% multiplier, reducing the tax rate to approximately 34%.

• Carried interest will be “qualifying” where it meets the existing 40-month average holding period test and potentially two new conditions that the government are now consulting on. The two new conditions are a minimum co-investment commitment, and minimum holding period between the award of the right to receive carried interest and the receipt of carried interest.

• A proposed amendment to the Income-Based Carried Interest (IBCI) rules that will mean carried interest that is received by employees and directors as employment related securities are no longer excluded from the “40-month average holding period” test and related aspects of the IBCI rules for loan origination funds.

Impacts of the changes