KEY INSIGHTS
Growth vs. revenue: The UK government is balancing its growth mission in financial services with the need to raise taxes to strengthen public finances – but the governments knows that it is not a zero-sum game.
No change to tax reforms: Measures such as abolishing the non-dom regime and reforming carried interest will remain in place despite evidence that their net benefits may be minimal or even negative.
Talent flight risk: The tax changes risk prompting financial professionals to leave, potentially undermining the UK's competitive edge and sustainable tax revenues.
Overview
A regular briefing for the alternative asset management industry.
The UK government is in a bind. It's "number one mission" is growth, including in financial services – as emphatically confirmed by a stream of highly ambitious announcements this week. But the UK's finance minister, Rachel Reeves, also needs to increase taxes to plug a gap in the public finances. Taxing prosperous professionals working in the UK's world-leading finance sector is politically attractive – but will not help the sector to grow.
In fact, some argue that the government should re-think already enacted measures that affect those working in financial services – especially since evidence is mounting that the net benefits to the public purse are minimal, perhaps even negative. Recent about-turns on tax policy show that course corrections are possible, even if they have been politically costly.
But the truth is that fundamental changes to two measures that have a particular impact on alternative asset managers – abolition of the "non-dom" regime, and reform of carried interest taxation – are highly unlikely. Instead, the UK government will continue to mitigate some of the more unpalatable impacts of these changes, and may be able to resist calls for more.
Abolition of the UK's generous tax treatment for non-doms – very broadly, people who are tax resident in the UK but whose permanent home is elsewhere – started under the previous (Conservative) government, but was confirmed by the incoming (Labour) government last year, and completed in April 2025.
At the same time, reform of the UK's tax system for carried interest began – first, with an increase in the tax rate for the current tax year (from a minimum of 28% to at least 32%), and then with a shift to taxation as trading income at a minimum effective rate of 34.1% from April next year.
In fact, what is currently called "income based carried interest" (broadly, carried interest from funds with a weighted-average holding period for their assets of less than 40 months) will continue to be taxed at full income tax rates (up to 47%), but this higher rate will no longer be confined to LLP members – employees will also be brought into scope.
Taken together, these changes mean that the UK has significantly diluted the attractiveness of its tax regime for those working in private capital. From April 2026, Britain will have the highest headline rate of carried interest tax among the mainstream European destinations – a smidgeon ahead of France, and significantly higher than Germany and Italy, whose effective headline rates are 28.5% and 26% respectively. Meanwhile, the Trump administration's most recent attempt to increase tax rates on carried interest in the US did not make the final version of the "One Big Beautiful Tax Act".
Headline rates matter, but so do the opportunities to mitigate that rate – and taxing carried interest as trading income, and abolishing the non-dom regime, compound the problem, especially for temporary residents. It is true that the time-limited non-dom replacement regime is quite generous, and may be attractive for relatively short stays –new arrivals can elect out of paying tax on much of their foreign income and gains for the first four years. And the government is (helpfully) looking at other ways to attract and retain financial services businesses – from a concierge service, to post Brexit regulatory reform. But tax policy is not helping.
"Taken together, these changes mean that the UK has significantly diluted the attractiveness of its tax regime for those working in private capital."
It is becoming clear that people are leaving the UK in response to these (and other) tax changes. That is not surprising: the government's own analysis of the impact of the changes predicted that a significant number of people would leave, while also noting that predictions are highly uncertain given that they depend on the behavioural responses of a small number of people. If just a few more people leave than the government expected – and, perhaps even more importantly, if fewer people come – the policies will actually result in a net loss to the revenue in the years ahead. Globally mobile executives might well be less willing to take up a role in the UK, or even to attend meetings there, and that will hamper the government's growth mission.
The UK Treasury is clearly acutely aware of the issue and, even though fundamental changes do not seem on the cards, it is keen to help.
For example, the UK's policymakers have listened carefully to the British Private Equity and Venture Capital Association (BVCA). Although the government has pressed on with the change to rates, and remains determined to tax carried interest as trading income, it has taken note of the industry's concerns and has responded positively. In particular, it shelved plans to add further conditions before carried interest can qualify for the reduced rate of 34.1%, and it has pledged to make it easier for those working in private credit, funds of funds and secondaries to qualify. In addition, specific and very helpful limitations to the tax charge will be introduced for non-residents. These include allowing them to spend up to 59 "workdays" per tax year in the UK without carried interest arising from those days becoming chargeable (as long as the carried interest also passes the average holding period test).
This is all helpful, but problems remain. The UK asserts wider ranging taxing rights over trading income than investment returns, bringing non-residents into the UK tax net for carried interest deriving from work they perform there. For those who cannot benefit from the more specific limitations the government has introduced, they may have to fall back on a double tax treaty. There is, however, no guarantee that treaty relief will be available, which makes the position both uncertain and complicated.
A further difficult aspect of trading income treatment is that it pulls carried interest within the UK's "payment on account" rules that require taxpayers to make advance payments of tax based on their liability from the previous year. This works well for traders with steady income streams, but is wholly unsuitable for the irregular and lumpy nature of carried interest.
Meanwhile, as the impact of the non-dom changes becomes clearer, some smoothing of a particular rough edge may be on the cards. The extension of the UK's inheritance tax net to "long term UK residents" has caused considerable concern – raising the prospect of a 40% tax on worldwide assets. There are suggestions that this may be under review.
So, solutions to some of the most acute issues may yet be found, but the government's basic position seems unshakeable. Unlike its changes to the "winter fuel allowance" for pensioners, and payments to those claiming disability benefits, these carried interest and non-dom changes are unlikely to be reversed. That's regrettable because, in taxing carried interest at these new rates, the UK will be at the top of the range for mainstream jurisdictions. European countries with attractive inpatriate regimes, such as Italy and Switzerland, look well placed to benefit.
Looking forward, as the British government contemplates its options to raise more revenue in the run up to the October budget – and considers whether to impose a wealth tax – it will no doubt be conscious of the dichotomy it faces: politically easy targets may not be the best bet if the government wants to build a sustainable tax base, and prioritise economic growth.
Click here to read our in-depth analysis of the ambitious, wide-ranging and potentially game-changing financial services reforms announced by the UK government this week.
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