What is carried interest?

Carried interest is the share of an investment fund's profits paid to its managers, typically around 20%. It is paid once investors have received a minimum return. It is common in private equity. Since 6 April 2026 it has been taxed in the UK as income, at an effective rate of around 34%.

Private equity and venture capital funds pool money from investors to buy and grow companies. Managers usually charge a yearly fee, plus a share of profits above a target return, called the hurdle. That share of profits is the carried interest, or carry. It can be worth many millions of pounds to senior managers. Many earn it in London. Carry is only paid if the fund does well.

For years, carried interest was taxed as a capital gain, at 28%, rather than as income at up to 45%. Critics called this a loophole. The rate rose to 32% in April 2025. From 6 April 2026 carried interest is taxed within the income tax and National Insurance system, but only 72.5% of qualifying carry is taxable. This gives an effective rate of around 34% for top earners.

Supporters of the change say managers' rewards for their work should be taxed like other earnings. The industry argues carry is a genuine return on risk and that high rates could drive managers and funds abroad. The number of people affected is small, but the sums involved are large. The change took effect from April 2026, and its effect on fund activity will be closely watched.

Who it affects: Private equity fund managers