Carried interest: Labour sticks by plans to up private equity bonus tax

Rachel Reeves has vowed to stick by Labour’s plans to increase tax on private equity bonuses, by upping the rate on carried interest transactions.

The shadow Chancellor pledged to “reform” the system – which sees investors hold onto a cut of gains made on successful deals, which is then taxed at 28 per cent – as she vowed to ensure “private equity bonuses are taxed properly”.

Labour wants to increase the levy to match the marginal income tax rate of 45 per cent, which, according to the Financial Times, could net the Treasury around £400m.

Some top City names have warned the move risks damaging the Square Miles if some dealmakers look to move overseas in search of a more friendly tax regimen – with European neighbours including France, Italy and Germany taxing carry at around 26 to 34 per cent.

Speaking at the Francis Crick Institute in north London at an event with Labour’s mayoral candidate Sadiq Khan, City A.M. asked Reeves about warnings from City figures that her plans could risk harming the Square Mile.

She said: “I think it is important that bonuses – whether they are in private equity or in other parts of the economy – are taxed properly.

“At the moment, private equity bonuses are not taxed properly. And we will reform that system.”

The FT also revealed this week that 3,000 UK dealmakers saw a £5bn windfall in carried interest in the 2022 tax year, as per Treasury analysis of Labour policy, versus just £3.4bn for 2,250 dealmakers the year before. 

Reeves also insisted she disagreed with “siren voices on both the left and the right” who stress the importance of the deficit’s size in measuring the economy’s health.

Discussing her recent Mais lecture, in which she laid out her economic vision for Britain, Reeves insisted Labour’s decision to adopt the Conservatives’ existing fiscal rule, to have debt fall as a share of GDP in five years, would not hold economic growth back.

The Institute for Government (IfG) said it was unclear how Reeves’ fiscal rules – including not borrowing to fund day-to-day spending – were consistent with Labour’s wider ambitions, including Keir Starmer’s mission to achieve the highest sustained growth in the G7.

“Debt is at too high of a level today,” Reeves said. “Our fiscal rules are that debt will be falling as a share of GDP by the end of the forecast period and with debt at close to 100 per cent of GDP today I think that is a really important fiscal rule.

“But we separate out in our fiscal rules day-to-day spending and capital spending.

“We will balance day-to-day spending with tax receipts and then free up the money that is needed to invest in long-term infrastructure. The government doesn’t do that and, as a result, makes short-term decisions that save money today but end up costing our economy.”

She added: “But the truth is there is more to growing an economy than just spending money. There are siren voices on both the left and the right that think the size of the deficit is a sign of a healthy or unhealthy economy. I disagree. 

“What matters is reforming our economy, reforming our trading relationships with the European Union, reforming our planning system, reforming how our skill system works. devolving more powers and authorities to our regional mayors and local leaders. 

“Those sorts of policies can unlock growth, as can a pro-business, pro-worker approach, which I’ve taken as shadow Chancellor and I know that Sadiq also takes in London.”