Making Tax Digital for carried interest

From 6 April 2026, carried interest will be treated as trading income and therefore subject to Income Tax and Class 4 National Insurance. This represents a significant shift from the previous UK tax treatment of carried interest and how it continues to be taxed in other jurisdictions. 

While much of the focus has understandably been on the potential increase in tax applicable to carried interest (from 32% to as high as 47% for non-qualifying carried interest), there is a secondary, but important implication. This change brings carried interest into the scope of Making Tax Digital (MTD) for Income Tax, which is also effective from 6 April 2026 for carried interest recipients. 

As a result, individuals receiving carried interest will need to consider not only the tax cost but also the associated compliance obligations.

What does this mean in practice?

Under MTD, individuals are required to:

• maintain digital records of their income and expenses, relating to MTD qualifying income
• submit quarterly returns within one month after the end of each quarter
• complete a final submission by 31 January following the end of the tax year.

For further details on the broader changes to carried interest from 6 April 2026, please refer to our previous guidance: UK Carried Interest Taxation.

If I receive carried interest, when will MTD apply? 

Entry into MTD is determined by the level of qualifying income reported in your previously submitted tax returns. For example, an individual will be within MTD as of the following dates:

• 6 April 2026 - £50,000 of qualifying income - determined by your 2024/25 tax return
• 6 April 2027 - £30,000 of qualifying income – determined by your 2025/26 tax return
• 6 April 2028 - £20,000 of qualifying income – determined by your 2026/27 tax return.

Under the new rules, carried interest will only count as qualifying income from 6 April 2026 and will first be reported as such on the 2026/27 tax return. This means that, for many individuals, MTD obligations would potentially qualify from 6 April 2028, with filing quarterly returns commencing at that point.

However, this timeline may accelerate where individuals have other sources of MTD qualifying income, such as income from self-employment (non-partnership income) or property letting income.

In addition, individuals whose carried interest was previously reported under the old income-based carried interest (IBCI) rules or had Disguised Investment Management Fees (DIMF) may already be within scope and therefore required to comply sooner.

Reporting carried interest under MTD

A practical complexity arises in how carried interest should be reported within the quarterly MTD framework.

Although distributions may be received throughout the year, the final ‘carry’ element is often not determined until after the tax year-end and completion of the relevant calculations performed. As a result, taxpayers may not have all the relevant information to file accurate MTD returns at the relevant time. 

At present, HMRC guidance in this area remains limited. Existing MTD guidance is largely written with sole traders and landlords in mind, where there is generally less ambiguity in what is considered qualifying income or expenses. 

Therefore, HMRC’s current suggested approach is that individuals should:

• Report ‘nil’ (or £0) in their quarterly returns in respect of their distribution, the final carried interest element is not yet known.
• Reflect the actual position in either the final submission or update the final quarter-end return once the final information is available.

This approach, however, raises practical concerns. In particular, it is unclear whether significant year-end adjustments will be flagged by HMRC’s systems, potentially drawing unnecessary attention to the individual.

A common question is, ‘If I will report 0 each return, can I just ignore MTD?’ In short, the answer is no. Quarterly returns remain a filing requirement and should therefore be submitted. Failing this in time could result in HMRC issuing penalties for late submissions.

Wider implications and administrative burdens

It is also important to note that once an individual is brought into MTD as a result of their carried interest, all sources of MTD-qualifying income must be reported, regardless of how small those amounts are.

For example, an investment manager receiving carried interest may also undertake some occasional freelance work (e.g. £200 per month) and generate small amounts of property income from letting out their parking space once a year for a popular event (e.g. £2,000 per year).

An individual who does not receive carried interest would remain below the MTD threshold. However, because the investment manager receives carried interest, they are required to submit separate quarterly returns for each income type. This would result in three sets of quarterly submissions (freelance, property, carried interest) and twelve quarterly returns a year, plus the final submission.

This creates a significant administrative burden, with limited additional insight being given to HMRC.

Next steps

Currently, there are no indications that Carried Interest or DIMF will be exempt from MTD. Individuals should therefore begin to factor these compliance requirements into their future tax considerations. 

We expect further clarification and guidance from HMRC in this area in due course. In the meantime, we recommend discussing your specific circumstances with your usual Crowe contact to understand how MTD rules may impact you and to ensure appropriate processes are in place ahead of implementation.

For more information on Making Tax Digital, please refer to our guidance: Making Tax Digital for Income Tax.