Glossary · UK
What is Carried Interest?
A fund manager's share of investment profits treated as a capital gain, historically taxed at 28% CGT.
Full Definition
Carried interest is the share of profits from a private equity, venture capital, or similar investment fund that accrues to the fund manager (typically 20% of profits above a hurdle rate) as compensation for managing the fund. Historically, carried interest has been treated as a capital gain rather than employment income, on the basis that the manager bears real economic risk by co-investing alongside investors. In the UK, qualifying carried interest has been subject to CGT at 28% (the higher rate for residential property and, previously, other assets). This treatment has been controversial, as critics argue it allows very high-earning fund managers to pay a lower effective tax rate than employees. From the 2025 Autumn Budget, carried interest rates were reformed: from 6 April 2025, carried interest is subject to Income Tax at an effective rate of 32.5% (a blended rate achieved through a 72.5% income inclusion). This replaced the previous CGT-only treatment. HMRC has detailed rules on what constitutes "qualifying" carried interest for favourable treatment, including minimum co-investment and fund holding period requirements. Fee income that does not qualify as carried interest is taxed as trading income or employment income at full rates.
How Carried Interest is calculated
Taxable carry (2026/27) = Carried interest x 72.5%
Tax due = Taxable carry x Income Tax + NIC rate- Carried interest
- The fund manager's share of investment profits, typically 20% above a hurdle rate.
- 72.5% multiplier
- Qualifying carried interest inclusion rate applied from 6 April 2025, giving a blended effective rate of around 32.5% under Income Tax.
Worked example: On GBP 200,000 of qualifying carried interest, GBP 145,000 (72.5%) is brought into Income Tax and NICs, giving an effective tax rate of roughly 32.5% overall - compared with the previous flat 28% CGT-only treatment.