The UK government’s decision to raise the tax on carried interest—the performance fees private equity (PE) fund managers earn from asset sales—from 28% to 32% is a pivotal moment for the industry. This move, announced by Finance Minister Rachel Reeves, is part of a broader capital gains tax overhaul and will come into effect in April 2025, with further adjustments scheduled for 2026.

Many PE managers anticipated a steeper increase, fearing the rate might be aligned with income tax at 45%. With a moderate hike instead, there’s cautious optimism within the sector. Though a 4% rise might seem manageable, upcoming reforms could see carried interest included within the income tax framework, potentially raising the effective tax rate to over 34%. For the approximately 3,100 individuals affected by these taxes in the UK, these changes signal a shift in the government’s stance on high earners and tax efficiency (Wilkes, 2024).

“It is welcome that the government has listened to our arguments on the value of the private capital industry,” says Michael Moore, chief executive of lobby group the British Private Equity and Venture Capital Association (BVCA).

 

What does this mean for the PE industry and its relationship with the UK economy? Critics argue that carried interest should be taxed as income, noting that it compensates managers for their work, primarily with other people’s capital. On the other hand, supporters within the industry highlight private equity’s significant role in driving private investment, particularly crucial amid uncertain economic conditions. This sector brings in substantial capital, fostering job creation and business expansion (de Beer & Le, 2024).

As the government considers additional measures, such as extending holding periods and co-investment requirements, it’s clear that the regulatory landscape for PE in the UK is shifting. This reform sends a message: the government is balancing between sustaining an investment-friendly environment and ensuring fairer taxation on high earners.

For private equity, this will require strategic adaptation. Firms may reconsider how they structure deals or operate in the UK, but with only a slight tax rise now and the government’s acknowledgment of private equity’s value to the UK economy, the sector will likely continue to thrive—albeit with a little more caution.

 

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