Private Equity remuneration and wealth planning opportunities

A fixed annual salary, often ranging from £100,000 to £250,000 for mid-to-senior professionals in the UK, provides stability but is a minor portion of total earnings.

Post-Budget Change: The Labour Budget increased employer National Insurance (NI) contributions from 13.8% to 15% and lowered the threshold from £9,100 to £5,000, effective April 2025. This indirectly pressures firms to adjust salary structures, though base salaries are unlikely to rise significantly due to reliance on performance-based pay.

Often the most lucrative component, carried interest is a share of the fund’s profits (typically 20%) paid to PE professionals after returning capital to investors and meeting a hurdle rate (e.g., 8% IRR).

Current Regime (Until April 5, 2025)

Carried interest is taxed as capital gains at 28% for higher/additional-rate taxpayers, with no immediate change from the Budget.

Interim Increase (April 6, 2025 – April 5, 2026)

Effective April 6, 2025, the CGT rate on carried interest rises from 28% to 32%.

Applies to gains realized in the 2025/26 tax year, maintaining its capital gains status temporarily.

Full Reform (From April 6, 2026)

Carried interest will be taxed as trading income, not capital gains, ending the “loophole.”

Default Rate: Up to 45% income tax (additional rate) plus 2% Class 4 National Insurance Contributions (NICs), totalling 47%.

Qualifying Discount: “Qualifying” carried interest receives a 72.5% multiplier, reducing taxable income—e.g., an effective rate of ~32.625% income tax (72.5% of 45%) plus 2% NICs, totalling ~34.625%.

Qualifying Criteria: Must meet conditions (e.g., profit-related, significant risk, not tied to short-term holdings under 40 months)

Mechanics: Offers 30% income tax relief on investments up to £1 million (£2 million for knowledge-intensive companies), CGT deferral on reinvested gains, and CGT exemption on EIS gains after three years. Loss relief offsets income at marginal rates if investments fail.

Opportunity: Ideal for offsetting high income tax from bonuses or carry (if reclassified as income). The Budget confirmed EIS extension to 2035, ensuring longevity. Reinvesting gains before April 2025 defers CGT at the new 24% rate.

Critique: High-risk due to unquoted company exposure; illiquidity (minimum three-year hold) may deter those needing flexibility. Tax relief caps limit scalability for ultra-high earners. Delayed deployment times, may limit ability to acquire reliefs.

Mechanics: Provides 30% income tax relief on investments up to £200,000, tax-free dividends, and CGT exemption on gains, with a five-year holding period. Extended to 2035 per the Budget.

Opportunity: Suits PE professionals seeking tax-free income to supplement carry. Smaller investment cap makes it a tactical rather than primary tool.

Critique: Lower cap (£200,000 vs. EIS’s £1 million) restricts scale. Market volatility in AIM-listed VCTs adds risk, and upfront relief requires sufficient income tax liability, which carry (as CGT) doesn’t trigger.

Mechanics: Investment wrappers held outside the UK, deferring tax until encashment. Gains are taxed as income (up to 45%) but can be timed for lower-rate years or offset with top-slicing relief.

Opportunity: Deferring CGT or bonus income tax beyond April 2025 avoids immediate 24% CGT or 45% income tax hits. Non-dom status abolition (April 2025) makes this less attractive for new arrivals, but existing users retain benefits.

Critique: Upon encashment, gains are taxed as income. Degree of inflexibility in access to capital in early years from inception.

ISAs: £20,000 annual limit offers CGT and dividend tax shelter but is insufficient for PE professionals’ wealth scale.

Pensions: Lifetime allowance (£1,073,100) scrapped, though 25% tax-free lump sum remains. Contributions reduce taxable income but cap at £60,000 annually, and tapering occurs between £260,000-£360,000 reducing allowance from £60,000 to £10,000.