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The Chancellor of the Exchequer has delivered the first Labour budget for 14 years, announcing significant changes which seek to balance filling a financial “black hole” against an agenda for driving economic growth.

What is the impact of the budget for private equity and venture capital?

Carried interest

With effect from 6 April 2025, and in advance of more substantive changes following a year later, the Chancellor has announced that carried interest currently subject to capital gains treatment will be subject to capital gains tax at a rate of 32%.

From 6 April 2026, carried interest will be brought fully within the income tax regime and will also be subject to national insurance contributions (NICs). Qualifying carried interest will benefit from a 72.5% multiplier which means that 27.5% will be exempt from tax.

Based on current rates, this will result in an effective tax rate on qualifying carried interest of just over 34%.

“Qualifying” is the important term here. The existing rules that apply for income-based carried interest (IBCI), which require a 40 month holding period, will need to be met. These will apply whether the carry holder is an employee or not.

Additional conditions will be introduced following consultation. The most likely of these include a minimum co-investment requirement and a minimum time period between award and receipt of the carried interest.

One potential consequence of these changes may be a non-UK resident paying tax on their carried interest years after they have left the UK. The budget documents indicate that this may work in the same way that it currently does for non-domiciled individuals. So, anyone who was UK resident during the lifetime of a fund may be subject to UK tax on their carry, even if they are non-UK resident when it arises.

Another consequence might be that where elements of carried interest have previously been taxed at 39.35% or 45% (where it had arisen from dividends or interest), all qualifying carried interest within the new regime could be taxable at 34.08%, thereby potentially reducing the overall effective tax rate.

The industry will be keenly monitoring the progress of the consultation.

Capital gains tax

From 30 October, the higher rate of capital gains tax will rise from 20% to 24% for individuals. This means that tax on amounts co-invested by fund managers will rise along with tax on carried interest.

Business asset disposal relief (formally entrepreneurs’ relief) will be retained with the current lifetime allowance of £1m, but will become less generous with the applicable tax rates increasing to 14% from 6 April 2025 and 18% from 6 April 2026.

National Insurance

Employers’ NICs will increase by 1.2% to 15% from 6 April 2025. In addition to this headline measure, the bigger change, which is expected to generate more tax revenue, is the reduction in the secondary threshold from £9,100 to £5,000, bringing more employees within the NIC regime.

Coupled with the increase to the national minimum wage, portfolio companies may need to revisit their financial models when it comes to forecasting employment-related costs.

The difference between effective tax rates for LLP members and employees / shareholders generally, has widened again to almost 7%. If a business can be run as an LLP, the tax benefit is becoming more marked.

Corporation tax

The main rate of corporation tax will be capped at 25% for the remainder of this Parliament.

The annual investment allowance (AIA) will remain at its current level of £1m, with a commitment to retaining full expensing for new plant and machinery.

A Corporate Tax Roadmap was published to deliver “predictability, stability and certainty” in the corporation tax regime, including certainty over  capital allowances projects, consultation on reforms to the transfer pricing legislation and modernisation of the  overall administration.

Importantly, there is a commitment to the substantial shareholding exemption (SSE), relief for R&D expenditure and the patent box regime.

What’s next for private equity and venture capital?

The next consultation period on carried interest has now begun and is set to end on 31 January 2025, which will give the government more than a year to finalise drafting the legislation prior to the new regime becoming effective from 6 April 2026.

For further information, please contact Lewis Tompkins.