Carried interest tax rate for private equity rises to 32%

A tax raid on the lucrative rewards enjoyed by dealmakers at private equity firms has been watered down after intense lobbying by the buyout industry.
Private equity executives can earn life-changing sums from carried interest, which is their share of the profits generated by successful investments overseen by their firms.
Carried interest is typically taxed as a capital gain at 28 per cent, but the government has said that the rate will increase to 32 per cent from April, before a new bespoke regime is introduced in 2026 that brings it within the income tax framework.
While this will result in an effective marginal tax rate of 34.1 per cent, according to the Office for Budget Responsibility, this is far lower than the 45 per cent top rate of income tax that the industry had once feared a Labour government would impose.
The changes were welcomed by the British Private Equity & Venture Capital Association, which had led the industry’s lobbying efforts. Michael Moore, the association’s chief executive, said: “The government has listened to our arguments on the value of the private capital industry and how important this sector is to the economy.”
Jacob Gold, a partner at Ashurst, a law firm, said the industry “will be breathing a sigh of relief”.
Some in the industry had warned there would be an exodus of top dealmakers from the UK if ministers made Britain an international outlier by lifting tax on carried interest too far. It is taxed at 34 per cent in France, while the Netherlands levies a 33 per cent rate and in Germany it is 28.5 per cent.
Rachel Reeves, the chancellor, had long pledged while Labour was in opposition to close the carried interest loophole. Three years ago she argued that it was “not right” that private equity managers were given a tax break “as they asset-strip some of our most valued businesses”.
Private equity firms seek to make money by acquiring companies using debt in leveraged buyouts and then overhauling these businesses to make them more efficient and selling them on, hopefully for a profit. Problems faced by some high-profile companies that have later struggled with the debts they were saddled with following their time under private equity ownership, including the now-collapsed Debenhams, have led to criticism of the private equity model.
Managers at buyout firms can make fortunes from the arrangements. They often have to co-invest alongside their firms to earn carried interest but they are not always required to have “skin in the game” to receive a portion of profits. According to the Centre for the Analysis of Taxation, 3,140 people shared in £3.7 billion of carried interest last year, with about a quarter of this going to 30 individuals.
The government expects its carried interest reforms will start to generate tax revenues only in 2027-28, when they total £140 million, and this will fall to £80 million the following year and amount to £85 million in 2029-30.
Some private equity dealmakers are expected to leave because of the changes. The OBR said its modelling “assumes that around 12 per cent of carried interest earners, who account for a quarter of all carried interest gains, are at high risk of migrating within the forecast period and taking a portion of all their receipts with them”.
The government said there would be “time for detailed engagement with expert stakeholders” before the new regime comes into force in 2026, giving the industry further scope to lobby for changes.
A source at a big private equity firm said Reeves appeared to be taking a “measured” approach to carried interest reform.