Now the Budget is over and we know that much of the speculation in the lead didn’t come to pass, many can breathe a cautious sigh of relief.
The headline-grabbing reforms that were feared, particularly a new National Insurance charge on partnership profits, did not materialise. But while the most dramatic changes were avoided, the Budget still brings important changes for partnerships and the wider PE landscape, as Head of Private Client, Stephen Kenny, explains.
What didn’t happen – National Insurance of partnership profits
In the run-up to the Budget, there were rumours that the Chancellor might extend employer National Insurance Contributions (NICs) to partnership profits, including those of LLPs. Such a move would have fundamentally altered the economics of partnership structures, raising costs for fund managers and potentially undermining the UK’s competitive edge as a global hub for private capital.
The British Private Equity & Venture Capital Association led a strong campaign against the proposal, warning it would risk driving investment and talent offshore. As such, this move was largely ruled out before the actual Budget. The Budget, as expected, was silent on new tax charges on partnerships or LLPs. For now, partners remain subject to self-employed NICs, and the LLP model continues to offer its familiar advantages.
How the Budget will affect partnership
While the feared NIC reform was shelved, the Chancellor announced a number of smaller measure that will affect all businesses and some that might hit harder on partnerships.
1. Freeze in Income Tax and NIC thresholds
The freeze on personal Income Tax and NIC thresholds has been extended until April 2031. This means the personal allowance (£12,570), higher rate (£50,270), and additional rate (£125,140) thresholds remain unchanged. By the end of the freeze there will be nearly a decade without an increase in the threshold. As partnerships are transparent for tax purposes the effect of this fiscal drag will be felt directly by the partners. There is also likely to be higher wage inflation on staff salaries in those years to compensate for the higher tax burden.
2. Cap on National Insurance relief for salary sacrifice
From April 2029, NIC relief on salary-sacrificed pension contributions will be capped at £2,000 per year. Contributions above this threshold will no longer be exempt from NICs, increasing marginal employment costs for partnerships that use salary sacrifice arrangements.
3. Dividend and savings tax increases
From April 2026, the basic and higher rates of dividend tax will rise by two percentage points, to 10.75% and 35.75% respectively. The additional rate remains at 39.35%. From April 2027, savings and property Income Tax rates will also increase by two percentage points. These changes are likely to hit on any investment returns, including co-investment returns from portfolio companies.
Carried Interest: new rules and their impact
Announced in the 2024 Budget, the most significant ongoing reform for private equity managers is the overhaul of carried interest taxation. Whilst no changes were announced in the 2025 Autumn Budget we have summarised these changes below.
Due to the fundamental shift in the taxation of carried interest caused by these changes, they have been introduced in stages.
Transitional year (2025/26)
From April 2025, carried interest is subject to a new, higher Capital Gains Tax (CGT) rate of 32% (up from 28%). This applies for one tax year only.
From April 2026: Income Tax and NICs
From April 2026, carried interest will be taxed as trading income, subject to Income Tax and Class 4 NICs. However, qualifying carried interest will benefit from a 72.5% multiplier. At current rates, this results in an effective tax rate of just over 34% – higher than the old CGT rate of 28%, but lower than the top income tax rate of 45%.
The qualifying rules require a 40-month holding period and may include further conditions after consultation. Non-qualifying carry will be taxed as income-based carried interest (IBCI), at standard Income tax and NIC rates.
Internationally mobile managers
The new rules mean that non-UK residents may be subject to UK tax on carried interest relating to services performed while resident in the UK, even if they have left the country when the carry is realised. There are some important concessions in the rules:
- Profits attributable to all duties performed in the UK prior to 30 October 2024 (effectively grandfathering any UK duties prior to last year’s Budget) will not be taxable;
- Profits attributable to any services performed in a tax year where the individual is non-UK tax resident and spends less than 60 workdays in the UK in the relevant tax year will not be taxable; and
- Profits attributable to any UK duties will be treated as being attributable to non-UK duties if (i) the individual has been non-UK tax resident for at least 3 tax years before the carried interest arises, and (ii) in each such tax year they worked in the UK for fewer than 60 workdays.
If you have any questions about the topics discussed in this article, please feel free to contact Stephen Kenny.
