Case Studies
Compliance Case Study: How the UK’s Carried Interest Reform Will Affect Fund Managers
Starting April 2026, the UK's new rules recharacterize carried interest income as trading profits with steep tax changes. Here's what fund managers need to know—and how to prepare.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## What Is Changing & Why It Matters
In the UK’s Autumn Budget 2024, the government announced a **reform to the taxation of carried interest** for fund managers. From **April 2026**, carried interest will be taxed fully under the **Income Tax framework**, not Capital Gains Tax, with **Class 4 National Insurance Contributions** also applying. A 72.5% multiplier will be used to adjust the portion treated as trading profit. ([gov.uk](https://www.gov.uk/government/calls-for-evidence/the-tax-treatment-of-carried-interest-call-for-evidence/outcome/the-tax-treatment-of-carried-interest-government-response-and-policy-update-june-2025-accessible?utm_source=openai))
Previously, carried interest was taxed at Capital Gains Tax (CGT) rates: broadly 18% for lower-rate taxpayers and 24% for higher rates (non-residential property etc.) as per the new main CGT rates introduced in 2024. ([gov.uk](https://www.gov.uk/government/publications/autumn-budget-2024-overview-of-tax-legislation-and-rates-ootlar/841ddc37-58e0-4d3f-9b53-123e8903d274?utm_source=openai))
## How It Works in Practice: Numbers & Scenarios
Imagine a fund manager in UK earns £1,000,000 in carried interest in 2026:
- Under old CGT regime: they'd have paid ~24% CGT, so £240,000 tax; no NICs obligations.
- Under new rules: the full £1,000,000 is considered a trading profit; but with 72.5% multiplier, £725,000 is taxed under Income Tax + NICs. If Income Tax + NICs = say 45% combined, that's £326,250 tax—far higher.
If instead they earned £200,000 in carried interest:
- 72.5% ≈ £145,000 taxable subject to income tax; lower effective compared to £200,000 under CGT at 24%, but still likely higher than under previous lower CGT rates.
## Key Compliance & Preparation Steps
- **Start early:** Track carried interest accruals ahead of the reform's April 2026 start date.
- **Model your income:** Use your own marginal tax + NIC rates to see real after-tax income under both regimes.
- **Consider timing of receipt:** If carried interest is awarded before April 6, 2026, might still enjoy the CGT-based regime; explore front-loading or restructuring deals accordingly.
- **Documentation:** Fund agreements, partnership agreements need clarity on when and how carried interest is assigned or vested.
- **NIC liability:** Ensure correct National Insurance contributions are applied; employers or fund vehicles may have record-keeping obligations.
## Comparative: UK vs Other Jurisdictions
If you are a UK-based fund manager but with international clients or partnership splits in offshore jurisdictions:
- UK now exerts more taxing rights; offshore splits may be scrutinized under CFC/transfer pricing rules.
- In some jurisdictions like US or EU hubs, carried interest is already taxed as ordinary income (or has stricter rules), so UK reform may just align more with global norms.
## Strategic Takeaways
- Negotiate carried interest terms now: vesting, timing, payment schedules may be restructured to mitigate impact.
- Consider moving some activity to jurisdictions with favorable rules—but beware of UK CFC or residency rules that may drag liabilities back.
- Use CGT exemptions, reliefs already in existence (for example investors’ relief or business asset disposal relief) before they change in April 2025-2026. ([gov.uk](https://www.gov.uk/government/publications/autumn-budget-2024-overview-of-tax-legislation-and-rates-ootlar/841ddc37-58e0-4d3f-9b53-123e8903d274?utm_source=openai))
Carried interest reform represents a major compliance shift for UK fund managers. While tax bills will rise for many, those who plan ahead, get their documentation in order, and align structures appropriately may limit downside and stay competitive.