Dealmakers see first drop in carried interest in seven years as Labour plans overhaul of tax incentives

In August 2025, London’s private equity sector experienced a notable downturn: the number of UK-based dealmakers receiving carried interest declined in 2024 for the first time in at least seven years. The drop comes as the incoming Labour government prepares to overhaul the twin tax perks—capital gains relief and partnership allowances—that have underpinned the city’s attractiveness as a global financial hub.

Carried interest, the share of profits that fund managers earn on successful investments, has long been a cornerstone of private equity compensation. According to industry figures, approximately 1,350 UK-based professionals benefited from carried interest in 2023. That number fell by nearly 8% in 2024, dipping to around 1,240 recipients—a reversal of the robust growth that characterized the post-pandemic rebound.

Analysts attribute the decline to several factors. Uncertainties over Labour’s tax proposals—announced during last year’s campaign—led to a slowdown in dealmaking as firms reassessed compensation models. “Fund managers delayed commitments and restructurings while awaiting clarity on the new tax regime,” noted Emma Clarke, a partner at a leading private equity advisory. Higher interest rates and market volatility also squeezed exit valuations, reducing the quantum of carried interest paid out.

Under Labour’s manifesto, the government plans to align the tax rate on carried interest more closely with income tax rates, phasing out elements of the partnership allowance that currently allow managers to treat a sizable portion of their profit shares as capital gains. The changes aim to raise an estimated £2.5 billion over the next five years and address perceptions of unfairness in the rewards reaped by senior financiers.

London’s private equity community has mobilized against the reforms. The British Private Equity & Venture Capital Association (BVCA) has launched a lobbying campaign, arguing that the proposed measures risk driving talent and investment to more tax-friendly jurisdictions such as Luxembourg or Singapore. “We worry that these reforms, while well-intentioned, could erode London’s competitive edge,” said BVCA Director General Mark Caldwell.

Despite the pushback, Labour officials remain steadfast. Treasury spokesperson Amina Shah emphasized the government’s commitment to creating a fairer tax system. “It is not acceptable that fund managers enjoy rates far below those paid by doctors, teachers, and nurses,” Shah told the Financial Times in July. “Our reforms will ensure everyone pays their fair share without undermining the industry’s dynamism.”

Market participants are adapting. Some firms have begun offering alternative incentive structures, such as deferred equity awards or performance-based bonuses taxed at standard income rates. Others are exploring relocation or dual-office models, maintaining UK headquarters while routing profit allocations through international entities.

The broader economic implications are significant. Private equity has been a major source of capital for British businesses, deploying over £50 billion in 2023 alone. A sustained slowdown in deal activity could hamper growth in sectors ranging from technology to infrastructure. Conversely, proponents of the tax overhaul argue the changes could level the playing field and fund public services, supporting long-term economic stability.

As the UK braces for the legislative battle ahead, all eyes are on Chancellor of the Exchequer to be, who will introduce the Finance Bill later this year. Parliamentary debates will likely intensify as amendments are tabled and industry groups testify. For now, the once unbroken upward trajectory of carried interest in London’s private equity arena has paused, reflecting both market realities and the shifting political landscape.

The coming months will test the resilience of London’s financial ecosystem. Will the sector innovate around the reforms, or will the allure of unfettered carried interest diminish the capital flows that have fueled its rise? The answer will shape not only compensation for fund managers but the broader trajectory of the UK’s role in global finance.