Carried interest changes for the internationally mobile

The draft legislation published on 21 July provides further clarity on how the tax changes announced in October 2024 will affect inbound and outbound private equity (PE) executives.

The receipt of qualifying carried interest may also trigger a requirement to make “payments on account” towards the subsequent year’s income tax and NICs liability.

These two advance payments are each equivalent to half of the income tax and NICs liability being reported on the taxpayer’s self-assessment tax return. The first payment would be due by 31 January following the end of the tax year, with the second payment due by 31 July.

This means that on 31 January 2028 (the first tax payment date under the new regime), the executive will be required to pay 1.5x their tax liability for the 2026/27 tax year – the 2026/27 income tax and NICs liability and the first payment on account towards their 2027/28 liability.

This may also have cashflow implications depending on when the fund distributes qualifying carried interest. While it is possible to reduce payments on account, it is not always known what the precise income tax and NICs liability is going to be for the next year.

From 6 April 2026, carried interest will be taxed as trading income and will be subject to Class 4 national insurance contributions (NICs). For additional rate taxpayers, this will equate to income tax at 45% and NICs at 2%. 

Where carried interest is “qualifying”, a 72.5% multiplier will reduce the amount of the carried interest that is subject to income tax and NICs. This results in an effective income tax and NICs liability of 34.075% for an additional rate taxpayer.

The FIG regime applies to individuals coming to the UK either for the first time or after an absence of ten tax years or more. Unlike the old domicile rules, the new regime does not discriminate between UK and non-UK nationals.

Individuals qualifying for the FIG regime do not pay tax on foreign income and gains for the first four years after becoming UK tax resident. Unlike the old rules, this applies even if the income or gains are brought to the UK.

The system is less generous in that it will only apply for the first four tax years of residence and will require disclosure of the foreign income and gains not subject to tax. For those with less complex overseas financial arrangements, who are coming to the UK for a short period of time, the FIG regime should represent a significant simplification. It will make it easier to access overseas capital and comply with tax reporting obligations while resident in the UK.

Mr B has never lived or worked in the UK. He has been working for a fund since 6 April 2022 and is asked to relocate to the UK from abroad on 6 April 2026. He has been part of a carried interest scheme throughout this period. After moving to the UK his working time is divided equally between the UK and overseas.

A £1 million carried interest distribution is made on 5 April 2027. As the individual was not UK tax resident throughout the 10 years prior to becoming UK tax resident, he is eligible for the new foreign income and gains (FIG) regime.

The liability to UK tax is limited to the proportion of UK workdays during the duration of the scheme. He has 116 UK workdays out of a total 1,165 workdays. The apportioned carried interest figure is £99,570 (116/1165 x £1m).

Assuming the carried interest is qualifying, the 72.5% ‘multiplier’ will apply meaning that Mr B is liable to UK tax on a trading profit of £72,188 (£99,570 x 72.5%). Assuming he is liable to income tax and class 4 national insurance contributions as an additional rate taxpayer, the total tax due by 31 January 2028 is £33,928 (£72,188 x 47%)

Mr B would also need to make two payments on account of £16,964 each towards his 2027/28 liability. The first payment would also be payable by 31 January 2028. The second payment would be due by 31 July 2028.

Individuals who have left the UK will potentially remain liable to tax on UK-sourced carried interest receipts post-departure. This is by way of a day-based time-apportionment between UK and non-UK investment management services.

Guardrails have been put in place to ensure the introduction of the new rules does not adversely affect individuals who have already left the UK or were in the process of leaving the UK at the time of the announcements.

Where an individual is non-UK resident in a tax year then, for the purpose of the apportionment:

• Workdays up to and including 30 October 2024 are deemed as non-UK workdays
• Workdays in a year of non-UK residence, where there are fewer than 60 UK workdays, are deemed as non-UK workdays
• All workdays prior to a period of 3 or more years of non-UK tax residence with fewer than 60 UK workdays, are deemed to be non-UK workdays

Mrs A has been living and working in the UK since 2010 and decides to leave the UK on 6 April 2026. She is not tax resident in the UK for the 2026/27 tax year onwards.

A carried interest distribution of £1m is made to her on 5 April 2028 in respect of a scheme that commenced on 6 April 2020. The liability to tax is limited to the proportion of her UK workdays carried out during the period of the carried interest scheme.

• Days up to and including 30 October 2024: 0 – all days are deemed as non-UK workdays 
• Days from 31 October 2024 to 5 April 2026: 400  
• Days from 6 April 2026 to 5 April 2028: 0 – all days are deemed as non-UK workdays as she is non-UK resident and worked fewer than 60 workdays in the tax year

There were a total of 400 UK workdays during the period out of an overall 2,000 workdays. The apportioned carried interest figure is £200,000 (400/2000 x £1m).

Assuming the carried interest is qualifying, the 72.5% ‘multiplier’ will apply meaning that Mrs A is liable to UK tax on a trading profit of £145,000 (£200,000 x 72.5%). Assuming she is liable to income tax and class 4 national insurance contributions as an additional rate taxpayer the total tax due by 31 January 2029 is £68,150 (£145,000 x 47%).

An additional £34,075 would also need to be paid on account by 31 January 2029, with a second payment of £34,075 to be made by 31 July 2029.

The facts are as above, but the carried interest distribution is made on 6 April 2029.

At this point, Mrs A has been tax resident outside of the UK for three consecutive tax years and, in each of these years, she has had fewer than 60 UK workdays.

As a consequence, all UK workdays in the entire period are deemed to be non-UK workdays. Mrs A is not liable to UK tax on any of the carried interest distribution received and there is no requirement to make payments on account.

The draft legislation has also clarified the position for individuals who were not UK tax resident in the 2025/26 tax year or earlier, who resume tax residence in the UK within five years of departure and who realised a carried interest gain during that period of ‘temporary non-residence’.

These individuals will be treated as carrying on a trade in the year of their return and the profits of the trade will be equivalent to 72.5% of the gain, which accrued during the period of non-residence.

These rules will not impact individuals leaving the UK on or after 6 April 2026.

Ms C left the UK on 6 April 2025. She is not tax resident in the UK for the 2025/26, 2026/27 and 2027/28 tax years and a carried interest distribution of £1m is made to her on 5 April 2028. She returns to the UK on 6 April 2028.

Ms C is caught by the ‘temporary non-residence rules’. The carried interest is deemed to be qualifying and Ms C is liable to UK tax on a trading profit of £725,000 (£1m x 72.5%) arising in 2028/29. Assuming she is liable to income tax and class 4 national insurance contributions as an additional rate taxpayer the total tax due in the year of return is £340,750 (£725,000 x 47%).

The £340,750 liability would be payable by 31 January 2030 along with the first 2029/30 payment on account of £170,375 each towards her 2029/30 liability, with the second payment to be made by 31 July 2030.

The new FIG regime creates significant challenges for existing UK taxpayers and for those who are moving to the UK for the first time but have complex overseas investments arrangements and structures.

Despite these drawbacks, the new rules provide much needed clarity and flexibility for many internationally mobile executives, which should help private equity businesses that are seeking to attract overseas talent or promote internal secondments from their overseas offices.

Approval code: NTEH7082537