Overview
‘Carried interest’ is one of the main forms of pay in the private equity industry. Only around 0.01% of the UK population (6,440 individuals) reported any carried interest between 2017 and 2023, but over that period their total carry exceeded £22 billion. Carried interest is extremely concentrated amongst top executives. In 2020, the top 100 executives received an average of £15 million in carried interest each and paid an average effective tax rate of 29% on their total income and gains (including gains on co-investments taxed at 20%).
Carried interest is currently taxed as a capital gain at a rate of 28%. In June 2024, the FT quoted the then Shadow Chancellor Rachel Reeves as saying: 'I don’t think it is right that … what is essentially a bonus is taxed at a lower rate than employment income, when you’re not putting your own capital at risk”. Since entering government, Labour has reiterated its manifesto pledge to “take action in respect of the ‘carried interest’ loophole” by taxing carried interest like other ‘performance-related rewards’ and has said it will announce reforms in the upcoming Autumn Budget.
In this paper, they assess how much revenue could realistically be raised from increasing the tax rate on carried interest. This debate has so far been distorted by a lack of quantitative evidence on key characteristics of the carry population relevant to their mobility, with public discourse instead driven exclusively by anecdotes and assertions from industry insiders. This report aims to provide a corrective based on analysis of de-identified tax data covering all individuals who received carried interest between 2017-2023.
Key findings
1. For most carry recipients, the effect of the reform on their total take-home pay would be small. This is because the bottom 80% of carried interest recipients receive on average only around one third (35%) of their total pay from carry. Even amongst the top 100 best-paid executives, the carry share is still only 60% on average, meaning that an increase in the tax rate on carried interest from 28% to 45% results in a reduction in take-home pay of ‘only’ 16%.
2. Although carried interest recipients are indeed highly international, they are mostly settled in the UK. Almost half of all recipients are foreigners, broadly in line with other top paying positions in the UK financial sector. However, over 90% of carried interest going to foreigners is received by executives who have lived in the UK for 10 years or more, who are therefore likely to be relatively ‘sticky’ in their location decisions.
3. Recipients are no more mobile than other top earners. After five years’ residence, only around 5% of foreign recipients leave each year, declining to 1-2% per year for the longest stayers. Whilst private equity executives clearly travel a lot for work, the quantitative evidence does not suggest a population that is highly mobile in terms of where they live.
Further reading