The Labour party has climbed down on its proposal to heavily tax 'carried interest' for private equity executives, a perk that allows them to pay a lower tax rate on their share of investment profits. Initially, Shadow Chancellor Rachel Reeves pledged to raise £565 million a year by closing this "loophole." However, the revised plan, unveiled after a period of intense lobbying by the private equity industry, is now projected to yield only £80 million by 2028-29. This significant reduction in anticipated revenue has drawn criticism, as the original target was meant to fund public services.
Under the original proposal, carried interest would have been taxed as income, subject to a top rate of 45% plus national insurance. The revised scheme involves two main changes: for the 2025-26 tax year, the capital gains tax (CGT) rate on carried interest will increase to 32% from 28%. From 2026-27, carried interest will be treated as trading income from self-employment, ostensibly taxed within the income tax framework. However, a 72.5% "multiplier" will be applied, effectively discounting 27.5% of earnings. This means carried interest will be taxed at a marginal rate of just over 34%, significantly below the 47% marginal rate (income tax and National Insurance Contributions) applied to other forms of self-employment income.
The impact of this change is substantial. For an individual earning a £1 million bonus from carried interest, the taxable income is reduced to £725,000 due to the multiplier. This results in a total tax liability of £340,750, leaving post-tax earnings of £659,250. In contrast, a regular self-employed individual earning £1 million would face a £470,000 tax liability, with post-tax earnings of £530,000. This discrepancy saves the fund manager nearly £130,000. Critics argue that this revised policy does not genuinely close the loophole, but rather shifts its mechanics, continuing to offer a significant tax advantage to a small number of high-earning individuals.
