Entity Setup: What Entrepreneurs Need to Know About the UK’s Carried Interest Tax Reform

Overview of the Carried Interest Reform

The UK government has reformed the tax treatment of carried interest. Key changes include:

• From April 2026, carried interest will be taxed entirely under the Income Tax framework, rather than Capital Gains Tax. This means both Income Tax rates and Class 4 National Insurance will apply. (gov.uk)
• An increased Capital Gains Tax rate of 32% for carried interest for those affected before April 2026, as an interim measure. (gov.uk)
• Use of a 72.5% multiplier to adjust the taxable amount of qualifying carried interest, accounting for the specific characteristics of these financial rewards. (gov.uk)

Impacts for Founders, Fund Managers, and Investors

• Higher effective tax rate: Moving from CGT to Income Tax plus NICs increases overall tax on carried interest.
• Reduced incentive effect: The 72.5% multiplier lowers the taxable base, but the shift still reduces after-tax returns under many scenarios.
• Structuring considerations: Entrepreneurs need to analyze whether investment vehicles or compensation models still make sense under the new regime.

Actionable Structuring Strategies

1. Assess timing of carried interest realization

   • If possible, plan exits or distributions before April 2026 under the older regime to benefit from CGT treatment.
   • Consider partial exits before the reforms come into force.

2. Review fund terms and profit allocation

   • Negotiate carried interest terms: hurdle rates, catch-ups, priority returns may matter more under higher tax burdens.
   • Explore whether certain profits can be reclassified or deferred.

3. Use legal entities wisely

   • Explore whether limited companies or partnerships might offer more favorable treatment.
   • Consider use of family investment companies, trusts, or other vehicles to optimize distributions.

4. Plan for compliance overhead

   • The shift to Income Tax framework means different reporting and payroll/NICs implications. Ensure systems are ready.

Example Scenario

Mark is a fund manager who stands to receive carried interest of £1 million from a private equity fund exit. Under the old CGT rules, assuming a rate of 20%, his tax would have been £200,000. Under the new regime (from April 2026), the calculation changes:

• His carried interest is taxed as income. Let’s assume Income Tax at 45% + Class 4 NICs at ~2-3%.
• With the 72.5% multiplier, only £725,000 of the £1 million is taxed at full rates.
• Tax liability: approx £725,000 x 48% ≈ £348,000.

That’s £148,000 more than under old CGT treatment—highlighting the importance of careful structuring.

Key Takeaways for Entrepreneurs

• If exit or realization is imminent, consider accelerating plans before April 2026.
• Structure compensation carefully—carry may need to be designed with new thresholds or hurdles to offset tax impact.
• Monitor fund documentation and tax treaties that could influence exposure.
• Seek professional advice on reporting and managing NIC liabilities.

Conclusion

The carried interest reform represents a major move in how the UK taxes performance rewards in private capital. For entrepreneurs and fund investors, understanding these changes now—and structuring accordingly—can make a substantial financial difference. Don’t assume the old rules persist; get ahead of the April 2026 shift.