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Ten Key Facts about Carried Interest

By Arun Advani, Sebastian Gazmuri-Barker, Sanaya Mahajan, and Andy Summers.

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The Centre for the Analysis of Taxation (CenTax) has published a new policy brief,  Ten Key Facts about Carried Interest.

Carried interest (or “carry” for short) is one of the main forms of pay in the private equity industry. Unlike earnings, which are taxed at a top marginal rate of 47%, carried interest is currently taxed as a capital gain at the rate of 28%.

The tax treatment of carried interest is highly controversial. Following the 2024 General Election, the Government reiterated its intention to ‘close the carried interest loophole’ by taxing carry like other performance-related rewards. However, it has come under significant pressure to scale back these plans following claims by industry insiders that increasing taxes on private equity executives could lead to a mass exodus of individuals and investment from the UK.

The paper is believed to be the first independent study on this topic. The authors provide new quantitative evidence on carry recipients using representative data, to help set high-profile anecdotes in context.

In a companion paper (Advani et al, 2024), the analysis is used to inform estimates of the revenue that could be raised from reforming the taxation of carried interest, after accounting for how carry recipients might respond.

Key findings

  1. Carried interest has increased rapidly since 2017, although the future is uncertain. From 2017-2023, the number of carry recipients has grown steadily from 1,850 to 3,140 (a 70% increase). However, while total reported carry grew from £2.3 billion to £3.7 billion (a 60% increase), the growth has been volatile with a sharp fall in 2023, making future projections highly uncertain.
  2. Existing statistics underestimate carried interest. We estimate £1.7 billion in unreported carry between 2018 and 2020, which is an extra 21% on top of the £7.7 billion that was reported to HMRC. Around half (£820 million) of the extra comes from carry ‘misclassified’ as residential property gains on the SA108 tax form (although with no underpayment of tax), while another half (£850 million) comes from foreign unremitted carry of remittance basis users, which is currently not reported or subject to UK tax.
  3. Carried interest is extremely concentrated amongst a small number of top executives. The top 30 individuals alone received around a quarter of all carry in 2023, totalling £1 billion – an average of over £33 million each. The top 100 received a total of £1.8 billion, almost half (45%) of all carry in that year. Even aggregating over a seven-year period from 2017-2023 we find that the top 100 still received more than a third (36%) of all carry, an average of £90 million per person over the period.
  4. Carry recipients fit the ‘City’ stereotype even more than others in finance. Men make up 85% of carry recipients and receive 96% of all carry. Middle aged individuals, between 40 and 60, make up more than two thirds of recipients and receive three quarters (76%) of all carry. Carry recipients also live predominantly in London and the South East (82%), with these regions together receiving 88% of all UK carry. Residents of Kensington receive more carry than everyone living outside London and the South East (16% vs 12%).
  5. Almost half of carry recipients are foreign, but most have lived in the UK for a long time. Carry recipients are much more international than the general population (44% versus 15%). However, four out of five (79%) foreigners receiving carry have already lived in the UK for at least 10 years, corresponding to 91% of the reported carried interest going to foreigners. Even accounting for the unremitted carried interest of remittance basis users, it is still the case that 60% of all carry going to foreigners is received by individuals who have been resident in the UK for at least 15 years.
  6. Foreign carry recipients come from a wide range of countries. UK ‘natives’ comprise just over half (56%) of carry recipients and receive just over half (55%) of all UK carry. US nationals receive 10% of all carry, while European nationals receive a 20% share, with 14% going to individuals from the ‘EU-6’ in particular. Three in ten carry recipients are not from the US or Europe, with Australia and India being the most common. Executives from the US and India are the best-paid on average, with Australian and Spanish executives the least well-paid out of the ten most common nationalities.
  7. Carry recipients do not put much of their own capital at risk. On average co-investment by carry recipients was not more than 0.8% of fund commitments based on carry received between 2018-2020, although this varies significantly across individuals. Two in five (42%) carry recipients had no co-investment, with most co-investment driven by a relatively small number of the most highly paid executives. One quarter (25%) of carry recipients, each with total pay over £5 million, account 70% of all co-investment.
  8. Carry makes up a small share of total pay for most recipients, but is more important at the top. For two-thirds of carry recipients (68%), carry is no more than half of their total pay (carry plus earnings) over 2018 and 2020. This share tends to rise for the best-paid executives. Amongst the one third (35%) of carry recipients who received less than £1 million in total pay, carry only made up around 30% of their pay, on average, whereas among the 8% of carry recipients who received over £10 million in total pay, carry made up 60% on average.
  9. Most carry recipients only receive carry occasionally, although it is more regular at the top. One third of carry recipients received carry only once in the seven-year period from 2017-2023. Less than 10% received carry every year, although they received more than a third (35%) of total carried interest in this period. Carry is received more regularly by older executives: 34% of individuals aged 60+ receive carry for all years (17%) or all but one year (17%), and account for 68% of the carry going to this age group.
  10. Carry recipients currently pay much lower effective tax rates than other top earners in finance. At levels of total pay (earnings plus carry for those that receive it) over £100,000, the effective average tax rate of carry recipients is 7.7 percentage points lower than that of non-PE individuals in the finance industry. For individuals with pay over £2 million, the effective average tax rate is more than 10 percentage points lower for carry recipients compared with others working in finance.