Carried interest stopped being a capital gains question on 6 April 2026. From the 2026/27 tax year it is treated as the profit of a deemed trade, charged to income tax and Class 4 National Insurance — with a 72.5% multiplier applied to the portion that qualifies. The reform is in Finance Act 2026, and it completes a two-stage change that began when carried interest moved to a flat 32% capital gains rate a year earlier.
What actually changed
Section 58 and Schedule 11 of Finance Act 2026 insert a new set of provisions into ITTOIA 2005. The effect is structural rather than a rate tweak: an individual receiving carried interest is treated as carrying on a trade, and the carried interest — less permitted deductions — is treated as the profits of it.
That single move pulls carried interest out of the capital gains code and into the income tax framework, with Class 4 National Insurance following as it does for any trading profit. The changes have effect for 2026/27 and later years, but in relation to investment management services whenever those services were performed.
The staging matters when you are looking at older arrangements. A flat 32% capital gains rate applied to carried interest arising on or after 6 April 2025, replacing the 18% and 28% rates that came before it. The income tax regime applies to carried interest arising on or after 6 April 2026. Which rule bites depends on when the carried interest arose, not when the fund was raised.
The 72.5% multiplier and what qualifies
Not all carried interest is treated the same. The legislation splits it into qualifying and non-qualifying amounts, and only the qualifying part gets the discount:
- Non-qualifying carried interest is brought into the deemed trade in full;
- Qualifying carried interest is brought in at 72.5% of the amount, after permitted deductions;
- The split is decided by the average holding period of the fund's investments, on a sliding scale rather than a cliff edge.
The scale runs as follows. Under 36 months, none of the carried interest qualifies. From 36 months it phases in — 20% qualifying at 36 to 37 months, 40% at 37 to 38, 60% at 38 to 39, 80% at 39 to 40 — and at 40 months or more the whole amount qualifies. A fund realising positions at around three years therefore has a genuine cliff to manage, and the difference between 35 and 40 months of average holding is the difference between no discount and the full one.
Two conditions that were consulted on did not make it into the final rules. There is no minimum co-investment requirement, and no separate minimum time period requirement was introduced — the government concluded the complexity would not be proportionate. The 40-month average holding period test is a different thing and was retained.
What it costs, on stated assumptions
HMRC does not publish a single headline rate for this, and any figure you see quoted is arithmetic rather than an official number. The components are what matter. Take £100,000 of fully qualifying carried interest with no permitted deductions, received by someone already an additional rate taxpayer whose profits exceed the upper profits limit. The 72.5% multiplier brings £72,500 into charge; income tax at 45% is £32,625, and Class 4 National Insurance at the 2% rate adds £1,450. The total is £34,075.
Change any assumption and the answer moves. A lower marginal rate, permitted deductions, or carried interest that only partly qualifies all produce different numbers, and a recipient whose profits sit below the upper profits limit pays Class 4 at the main rate instead. Model the actual facts rather than applying a remembered percentage.
Non-residents are now in scope
The reform brings some people into UK tax on carried interest for the first time. The legislation works through the concept of a non-UK tax year: a year counts as one where the individual is non-UK resident and there are fewer than 60 UK workdays in it. UK workdays falling in a non-UK tax year are excluded, as is any UK workday before 30 October 2024.
Two practical points follow. Services performed while travelling to or from the UK by air, sea or the Channel Tunnel are assumed to be performed overseas. And where a treaty applies, the charge falls to be considered as business profits, typically under Article 7 — so the treaty analysis is now part of the answer rather than an afterthought. Executives who spend part of the year in London on fund business should be counting workdays from the start of the year, not reconstructing them afterwards.
What to do about it
The compliance work is front-loaded. Average holding periods have to be computed and evidenced fund by fund, because they decide the qualifying proportion and they are not a number most administrators were tracking to this standard. Permitted deductions need identifying before the return rather than after it. And for anyone with a cross-border pattern, the workday record is now a tax record.
Arrangements written when carried interest was a capital gain may also no longer do what they were designed to do. That includes structures built around the old remittance basis and anything whose value depended on capital treatment surviving — the point of comparison has changed, not just the rate.
Acumon advises fund executives and management teams on carried interest through private client tax and international tax work, alongside tax planning where the structure needs revisiting. If your fund's average holding period is close to 40 months and nobody has calculated it precisely, that is the number to establish before the next distribution.