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A group of 3,000 private equity dealmakers shared an annual carried interest windfall of about £5bn in the 2022 tax year, highlighting the large sums at stake in the UK debate over how these payouts should be taxed.
The figure, disclosed in a Treasury analysis of Labour party policy, shows the gains made during what was a lucrative year for the private equity industry, thanks in part to buoyant stock markets.
Most of these taxpayers “have high levels of income and gains, and can be highly mobile”, according to the report, based on UK tax authority data for the 2021-22 year.
The haul compared with £3.4bn that a group of 2,550 UK taxpaying dealmakers declared for the previous tax year, according to the same analysis, which was published in February.
So-called carried interest — the cut of gains private equity investors make on successful deals — has come under increasing scrutiny in the UK after the Labour party pledged to increase taxation of the incentive fee from 28 per cent to the marginal income tax rate of 45 per cent.
Labour’s pledge to raise the rate if it triumphs at the next general election expected later this year has prompted some City figures to warn it could have a damaging impact if some dealmakers and their advisers including lawyers and bankers depart to other countries. Generally treated as capital gains, carry is taxed at between 26 per cent and 34 per cent in France, Italy and Germany.
Labour has estimated that raising the levy to the top income rate will earn the Treasury about £400mn, while top tax lawyer Dan Neidle estimated that carried interest’s tax treatment meant the UK tax authority was missing out on about £600mn a year.
UK Treasury officials, working on assumptions provided by Conservative advisers, have said increasing tax could cost the government as much as £3.3bn if the policy is introduced in 2025 and runs to the end of 2029, if wealthy people decide to move out of the country.
Some Labour politicians have put pressure on shadow chancellor Rachel Reeves to lower the new tax rate to somewhere closer to other European countries to prevent departures.
Shadow business secretary Jonathan Reynolds told the Financial Times in February that Labour was committed to closing the loophole. But he added: “We will work with the sector on the implementation.”
Some private equity executives remain hopeful that Labour will either scrap the plan or compromise to increase the tax rate by only a few points.