The U.K. government moved closer to closing the so-called carried interest tax loophole for private capital firms, increasing tax first to 32% before moving to a revised regime, it said in its annual Autumn Budget.
The new Labour government said in its first fiscal update that the tax treatment of carried interest — the performance-related remuneration received by investment managers, largely in the private equity industry — would be increased to 32% from the current capital gains rates of 18% and 28%. Starting in April 2026, it will then move to a revised regime, with “bespoke rules to reflect the characteristics of the reward,” according to a government document.
The move was welcomed by the British Private Equity and Venture Capital Association, which said the government had listened to its arguments on how important the private capital industry is to the U.K. economy.
“We recognize that the government has had to balance the need to raise revenue for essential public services with the requirement to keep our economy competitive,” said Michael Moore, CEO of the association, in emailed comments. “The announcement on carried interest recognizes that a tax treatment which reflects the long term, risk-based nature of private capital investments is necessary to ensure that this important U.K. sector can continue to flourish in an increasingly competitive international environment.”
The industry will work with the government to ensure any risks of reducing investment are mitigated, Moore added.
U.K. retirement industry figures also questioned the long-term impact on the nation’s retirement savings due to the increase in employer contributions to national insurance, announced in the budget statement.
National insurance is a tax that both employees and employers must pay in the U.K., which goes toward funding welfare initiatives such as state retirement benefits. As part of plans to increase overall tax revenue by £40 billion ($52 billion) a year, Chancellor of the Exchequer Rachel Reeves increased national insurance contributions for employers to 15% from 13.8% of a worker’s earnings above a certain threshold starting in April next year.
According to former Pensions Minister Steve Webb, now a partner at consultant Lane Clark & Peacock, such a move will negatively impact any plans to mandate an increase to employer contributions to their workers’ retirement savings.
Analysis by the U.K. government’s Department for Work and Pensions, published in March 2023, suggested that just over half (51%) of all employees in the U.K., around 17.7 million people were not saving enough for a moderate retirement.
“The hike in employer pension contributions is terrible news for hopes of action to tackle Britain’s retirement undersaving crisis. Even the government accepts that millions of people are not saving enough for a decent retirement, and there is no doubt that part of the answer is workers and their employers contributing more. But with employers already having to absorb a big increase in payroll costs, it seems highly unlikely that the government will try to ‘double dip’ and ask employers to pay more for pensions any time soon,” Webb said.
Current rules on automatic enrollment into workplace retirement plans require employees to make a 5% contribution and firms a 3% contribution to a retirement plan, making for 8% in total.
“Stacking another cost on the pay and benefits for every U.K. corporate may drive behaviors that yet again can harm today’s ‘working people’ in their defined contribution retirement plans,” said Hannah English, head of DC Corporate at consultant Hymans Robertson.
“The change announced by the chancellor may be the final straw for those employers that have upheld their generous pension contributions despite difficult economic conditions. In this case, such scheme contribution structures may be increasingly get overhauled.”
The budget was described by some sources as a “damp squib” with regard to the wider retirement fund industry, with no mention of reforms to the U.K.’s local government pension schemes, or LGPS. The government had been looking at consolidation among the pension funds, with Reeves traveling to Toronto in September to meet with the so-called Maple 8 Canadian public pension plans.
