Private equity leaders earn £2.7bn in carried interest

Research from law firm Macfarlanes has found that 255 private equity executives earned £2.7bn in Carried Interest for the tax year 2020/2021. Carried interest, due to a quirk in the tax rules, is taxed as capital gains.

Carried Interest is the share of profits receivable by a general partner of an investment fund by virtue of their ownership of 'an interest' in the fund’s assets. Private equity funds are typically structured as Partnerships. but this type of income is not taxed as partnership income. Sums paid generally far exceed their basic pay from employment within the structure.

Due to long-standing favourable tax treatment, this form of income is charged as Capital Gains Tax at a rate of 28% rather than the 45% top-end Income Tax rate and as such also avoids a charge to National Insurance Contributions.

Macfarlanes' research also showed that 2,550 private equity executives made a total of £3.4bn in carried interest in the 2020-21 tax year and paid £952 million in tax. A quarter of those paid was registered as Non-domiciled taxpayers.

The research used data from private equity firms and through a freedom of information request to HMRC and was reported in the Financial Times.

According to Financial Time figures private equity companies have spent £80bn taking public companies private over the past five years.

The Labour Party has announced a revision of the Carried Interest rules which will be in its new Manifesto and say the changes would generate £440 million in additional tax revenue.

Useful guides on this topic

Tax on carried interest: The tax loophole for fund managers
Investment partner legitimately avoid Income Tax and National Insurance Contributions (NICs) by having their profits taxed under the Capital Gains Tax (CGT) regime.

Capital Gains Tax rates & allowances
What are the Capital Gains Tax rates, bands, reliefs and exemptions?

Tax Data Card 2023-24
A summary of key tax rates and allowances for 2023-24 and 2022-23.