UK Carried Interest Tax 32% Rate 2026: Complete Guide

Carried interest -- the performance fee at the heart of private equity, venture capital, and hedge fund compensation -- has long been a subject of political controversy in the UK. The treatment of carry as a capital gain (rather than income) allowed fund managers to pay tax at rates well below the income tax rates paid by their colleagues. The Autumn Budget 2024 began the process of fundamentally changing this, and from April 2026 the new framework is fully in place.

What Is Carried Interest?

Carried interest is the share of investment profits that fund managers receive as performance-based compensation, separate from management fees. In a typical private equity structure:

• The fund raises capital from institutional investors (limited partners, or LPs)
• The general partner (GP) -- the fund management firm -- invests alongside LPs, often contributing 1-2% of fund capital (the co-investment)
• Once the fund achieves a minimum return for investors (the hurdle rate, typically 8% per year), the GP receives a carried interest -- usually 20% of profits above the hurdle
• This carry is the primary long-term compensation for senior fund managers and partners

Historically, because carried interest arose from the appreciation of underlying fund investments (shares, property, debt instruments) held over several years, it was treated in the UK as a capital gain. Higher-rate taxpayers paid 28% on qualifying carry under the old rules, compared with up to 45% income tax plus NICs on equivalent salary or bonus income.

The Pre-Budget and Post-Budget Rate History

Before 30 October 2024 (the Autumn Budget date), qualifying carried interest was taxed at 28% CGT for higher and additional rate taxpayers. The government announced at the Budget:

1. An immediate interim increase to 32% CGT on carried interest, applying from 30 October 2024 itself
2. A new permanent statutory regime from 6 April 2026, also at 32%, but structured as an income-based charge rather than a capital gains charge

The distinction between CGT and income-based matters for several technical reasons including loss offset, treaty treatment, and interaction with income tax reliefs.

AIFMD-Qualifying Carried Interest: The 32% Rate

Not all carried interest automatically qualifies for the 32% rate. To benefit from the statutory 32% income-based charge rather than full income tax rates, the carry must meet the qualifying conditions:

Fund type. The fund must be an Alternative Investment Fund (AIF) within the scope of the Alternative Investment Fund Managers Directive (AIFMD). Most UK-regulated PE, VC, hedge, real estate, and infrastructure funds fall within AIFMD scope. Simple co-investment structures or vehicles outside the AIFMD framework may not.

Co-investment requirement. The manager must have made a meaningful co-investment alongside the LPs. The minimum co-investment threshold is set at 1% of the fund or a sterling amount, whichever is lower, broadly aligned with industry norms.

Risk requirement. The carried interest must be genuinely at risk -- there must be a real possibility that the manager receives nothing if the fund underperforms. Guaranteed or quasi-guaranteed carry arrangements do not qualify.

Average holding period of 40 months. The most technically demanding condition. The average holding period of the underlying portfolio investments must be 40 months or more (approximately 3 years and 4 months). This is calculated across all investments in the fund, weighted by value.

The 40-month holding period condition is designed to target the preferential rate at long-term, patient capital investment strategies -- principally buyout-style PE and infrastructure -- rather than shorter-hold strategies such as activist hedge funds or distressed debt trading.

Income-Based Carried Interest: Full Tax for Non-Qualifying Carry

Where carried interest does not meet the qualifying conditions -- either because the fund is not AIFMD-regulated, the co-investment or risk conditions are not met, or the average holding period is below 40 months -- it falls under the Income-Based Carried Interest (IBCI) rules.

IBCI has applied since 2016 for carry with average holding periods below 36 months (the old threshold). The new rules tighten this by raising the threshold to 40 months and applying IBCI to a broader range of structures.

Under IBCI, the carried interest is charged to income tax at up to 45% for additional-rate taxpayers. Depending on the precise employment or partnership structure, employee NICs at 8% (up to £50,270) and employer NICs at 15% may also apply, pushing the total tax cost well above 50% for some managers.

Practical Impact on Private Equity and Venture Capital

Buyout private equity. Traditional buyout funds with 5-7 year holding periods and portfolio company holds averaging 4-5 years will comfortably meet the 40-month average hold test. These managers are most likely to benefit from the 32% rate.

Venture capital. VC funds can have variable holding periods -- some portfolio companies exit quickly (acqui-hire within 2 years), others take a decade. The average holding period calculation across the whole portfolio is key. VC managers with a mix of fast and slow exits should model their expected average carefully.

Hedge funds. Many hedge fund strategies involve holding periods far below 40 months -- some measured in days or weeks. Most hedge fund carry will be taxed as IBCI, meaning income tax rates apply. The preferential 32% rate is unlikely to be available to the majority of hedge fund managers.

Infrastructure. Infrastructure funds typically hold assets for 15-20 years. Average holding periods are comfortably above 40 months, and carry from most infrastructure funds will qualify for the 32% rate.

Planning Considerations for Fund Managers

Review fund documentation. Ensure that carry waterfall arrangements, co-investment requirements, and risk features are well-documented to evidence qualifying conditions if HMRC enquires.

Model average holding periods. Build a model of expected average holding periods across the portfolio at inception and update it annually. If the hold profile shifts (through early exits or write-offs of short-hold investments), alert your tax advisers early so you can assess IBCI risk.

Consider the impact on treaty claims. For managers who are tax resident in two countries under a double tax treaty, the reclassification of carry from CGT to income-based charge affects which article of the treaty applies and potentially how the home country credits UK tax paid.

Salary and carry balance. Some managers will reconsider the balance between management fee income (salary/bonus) and carried interest. With carry taxed at 32% and salary at up to 45%, carry remains advantageous for those who qualify -- but the gap has narrowed.

The 32% carried interest charge from April 2026 represents a significant but not catastrophic increase in the tax cost of fund management in the UK. Qualifying managers remain in a meaningfully better position than if their carry were taxed as salary, but the days of 28% CGT on carry are over. Ensuring your fund structure and carry arrangement meet the qualifying conditions for the 32% rate is the most important planning priority for any fund manager operating in the UK.