From 6 April 2026 carried interest is no longer taxed as a capital gain. Section 58 of the Finance Act 2026 inserts sections 23I to 23R into the Income Tax (Trading and Other Income) Act 2005, which treat a fund manager who receives carried interest as carrying on a trade, so the carry is charged to Income Tax and Class 4 National Insurance. Carried interest that is “qualifying”, broadly from funds holding investments for 40 months or more on average, is brought in at 72.5% of its value.
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What changed on 6 April 2026?
Before the reform, the main rules sat in Chapter 5 of Part 3 of the Taxation of Chargeable Gains Act 1992, supported by definitions in Chapters 5E and 5F of Part 13 of the Income Tax Act 2007. Carried interest gains had their own Capital Gains Tax rates. GOV.UK’s table of past rates shows 18% and 28% up to 5 April 2025 and a flat 32% for 2025 to 2026 before the new regime took over.
Section 58(6) of the Finance Act 2026 makes the new rules apply for 2026 to 2027 and later years, “in relation to investment management services whenever performed”. There is no grandfathering for funds launched before the change: carry that arises on or after 6 April 2026 is taxed under the new rules. The Finance Act 2026 also removes the separate carried interest rates from section 1H TCGA 1992 (Schedule 11, Part 2), and GOV.UK’s Capital Gains Tax page now says carried interest received from 6 April 2026 is subject to Income Tax and National Insurance instead.
Who is caught by the new regime?
Section 23I applies where an individual performs investment management services, directly or indirectly, for an investment scheme under any arrangements, and carried interest arises to them under those arrangements. Section 23R defines the key terms:
- An investment scheme is a collective investment scheme within section 235 of the Financial Services and Markets Act 2000, or an alternative investment fund that is not one.
- Investment management services include investment advice, raising funds from investors, researching and acquiring investments, managing and disposing of them, helping portfolio companies raise funds, and anything incidental.
Under Schedule A1, paragraph 1, a sum is carried interest if it arises by way of “profit related return”: it depends on profits on the fund’s investments, varies substantially with those profits, and investors’ returns are also set by reference to them. Several amounts are carved out:
- any minimum amount that there was no significant risk would not arise (paragraph 1(3));
- returns on genuine co investment made on arm’s length terms (paragraph 5); and
- sums already charged as employment income, or employment related securities income, in the year (section 23I(5)).
The government’s July 2025 policy paper says the measure affects individuals who are UK resident or whose carried interest relates to services performed in the UK.
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How does the 72.5% multiplier work?
Section 23I(2) sets the profits of the deemed trade as the non qualifying profits plus 72.5% of the qualifying profits. Each category is carried interest of that type less a proportionate share of permitted deductions. Whether carry is qualifying depends on the fund’s average holding period, measured when the carry arises, under the table in Schedule A1, paragraph 12:
| Average holding period | Proportion qualifying |
|---|---|
| Less than 36 months | 0% |
| 36 months to less than 37 | 20% |
| 37 months to less than 38 | 40% |
| 38 months to less than 39 | 60% |
| 39 months to less than 40 | 80% |
| 40 months or more | 100% |
Chapters 2 to 5 of Part 3 of Schedule A1 contain detailed rules on how investments, part disposals, derivatives and fund of funds structures are counted, with special rules for controlling equity, real estate and credit funds. Chapter 6 allows “conditionally qualifying” carried interest to be treated as fully qualifying where it is reasonable to assume it would qualify if it arose later. Anti avoidance rules ignore arrangements designed to increase the qualifying proportion.
What can be deducted?
Very little. Section 23N allows a “permitted deduction” for consideration given wholly and exclusively for the right to carried interest, in money or money’s worth, less any amount already deducted in an earlier year. The value of investment management services does not count as consideration, and section 23N(3) says no other deduction may be made. Expenses that would be deductible in an ordinary trade are not available against the deemed trade.
What effective rate does this produce?
Illustration only. Alex, an additional rate taxpayer with other income well above the higher rate threshold, receives £1,000,000 of fully qualifying carried interest in 2026 to 2027 and paid nothing for the entitlement. The taxable trading profit is 72.5% of £1,000,000, or £725,000. At the 45% additional rate of Income Tax that is £326,250, and Class 4 National Insurance at 2% on profits above £50,270 adds £14,500 assuming Alex’s other self employed profits already exceed that limit. The total of £340,750 is about 34.1% of the carry. Had the fund’s average holding period been under 36 months, the full £1,000,000 would be taxed, giving £470,000.
How are non residents taxed?
The deemed trade is located by reference to workdays. Under section 23K a day is a UK workday if the individual spends more than three hours in the UK performing investment management services, and the trade is treated as carried on in the UK in proportion to UK workdays over the relevant period. For a non resident, several categories of UK workday are disregarded when apportioning qualifying profits:
- UK workdays before 30 October 2024;
- UK workdays in a “non UK tax year”, meaning a year in which the individual is not UK resident and has fewer than 60 UK workdays; and
- UK workdays before a run of three or more non UK tax years.
The June 2025 government response adds that, where a double taxation agreement applies, the UK expects to tax a non resident only where the services are attributable to a UK permanent establishment. Services performed while travelling to or from the UK by air, sea or tunnel are treated as performed overseas.
Which elections are available?
- Section 23J election. Where carry would in any case be part of the profits of a real trade carried on by the individual, they can elect for section 23I not to apply to it. The election is irrevocable and must be made by 31 January after the end of the tax year it covers.
- Schedule A1, paragraph 36 election. An individual can elect to be taxed each year on the carry that would arise if the fund realised its investments at cost and distributed the proceeds, rather than waiting for actual receipt. It is irrevocable, names the first year it applies to and must be made by 31 January after that year.
Section 23Q prevents double charges to Income Tax and allows a claim for consequential adjustments where other UK taxes have been paid on the same sum.
How is it reported and paid?
Because the carry is treated as trading profit, it is reported through Self Assessment and counts towards the previous year’s liability used to set payments on account. The government confirmed this in June 2025 and pointed to the existing claim to reduce payments on account where receipts are irregular. Partners in fund management firms should keep this separate from their ordinary profit share; the wider position of members is covered in limited liability partnerships and mixed member partnerships.
What mistakes come up most often?
- Continuing to report carry received after 5 April 2026 as a capital gain on the SA108.
- Applying the 72.5% multiplier to all carry without checking the fund’s average holding period.
- Deducting costs other than amounts paid for the carry entitlement.
- Non residents assuming past UK work is irrelevant, when UK workdays since 30 October 2024 can bring carry into charge.
- Missing the 31 January deadlines for the section 23J and paragraph 36 elections.
- Forgetting the effect of a large carry receipt on the next year’s payments on account.
Rates for gains that remain within Capital Gains Tax are set out in Capital Gains Tax rates.
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Related Accountapedia entries
- Overseas workday relief
- Offshore funds: reporting and non reporting status
- Separate property income tax rates from April 2027
- Investors’ Relief
- The four year foreign income and gains regime
- Agency liability for umbrella company PAYE from April 2026
Sources
- legislation.gov.uk: Act 2026 c. 11, section 58
- GOV.UK: Revised tax regime for carried interest
- GOV.UK: Capital gains tax rates and allowances
- GOV.UK: The tax treatment of carried interest government response and policy u
- GOV.UK: Rates
- legislation.gov.uk: Act 2026 c. 11, schedule 11
- GOV.UK: Income tax rates
- GOV.UK: Self employed national insurance rates
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.