Non-dom status and carried interest: two ways personal wealth was taxed more gently than your wages

Two of the clearest examples of personal wealth being taxed more gently than ordinary earnings are the non-dom regime and the taxation of carried interest. One let certain UK residents pay no UK tax on foreign income they kept offshore. The other let fund managers have a large slice of their reward taxed as a capital gain instead of as income. Both were entirely legal. One has now been abolished; the other is being reformed in stages. Here is how each worked, and exactly what has changed.

The non-dom regime: 225 years of a separate rule book

A "non-dom" was a UK resident whose permanent home, in tax law, was treated as being somewhere else. The concept dates to 1799 and survived, largely intact, for over 225 years. Under the remittance basis, a non-dom could live in the UK full-time, work here and own property here, yet pay no UK tax on foreign income and gains, as long as that money stayed offshore.

The mechanics favoured the very wealthy. Foreign income under £2,000 a year sat on the remittance basis automatically, at no cost. Above that, a Remittance Basis Charge applied: £30,000 a year after seven years of UK residence, rising to £60,000 after twelve. At the income levels of the people using it, that was a rounding error. Offshore estates held through trusts also sat outside UK inheritance tax, because a non-dom was liable to UK inheritance tax only on UK assets.

The scale was real but not enormous. In 2022 to 2023, HMRC recorded about 74,000 non-domiciled UK resident taxpayers; counting those who had become "deemed domiciled" after fifteen years here, the pool was 83,800. Their combined income tax, capital gains tax and National Insurance came to £12.3 billion, an average of about £147,000 each. That is what they did pay, not what they would have owed without the regime.

The unfairness was structural, not behavioural. A UK-born worker on £100,000 with £50,000 of foreign investment income owed UK tax on every pound. A non-dom in identical circumstances owed nothing on the £50,000 unless it crossed the border into a UK bank account.

Abolition from 6 April 2025

The end was announced by a Conservative chancellor, Jeremy Hunt, in the March 2024 Budget, confirmed by Labour's Rachel Reeves in the October 2024 Budget, and enacted in the Finance Act 2025. From 6 April 2025:

• The remittance basis was abolished. All UK residents are now taxed on worldwide income and gains as they arise, regardless of domicile.
• A new 4-year Foreign Income and Gains regime replaced it for new arrivals. Someone who has not been UK-resident in any of the previous ten consecutive years gets 100% relief on foreign income and gains for their first four years here, then pays like everyone else.
• Inheritance tax moved onto a residence basis. You become liable on worldwide assets once you have been UK-resident for at least ten of the past twenty tax years, with a tail of up to ten years after you leave.
• A Temporary Repatriation Facility lets former remittance-basis users bring previously untaxed offshore money into the UK at a reduced rate of 12% for 2025-26 and 2026-27, and 15% for 2027-28.

How much will this raise, and will the wealthy flee? A 2022 study by Advani, Burgherr and Summers at Warwick and the LSE, written before the reform as an input to the debate, estimated that abolition could raise more than £3.2 billion a year, and concluded most non-doms would stay. In 2025, HMRC data reported by the Financial Times showed departures tracking in line with or below the official OBR forecasts, undercutting the predicted exodus. The £3.2 billion is a pre-reform estimate, not an outturn; we will update it when the actual figures land.

Carried interest: a profit share taxed as a gain

Carried interest, or "carry," is the slice of a fund's profits, typically around 20%, paid to private equity and hedge fund managers as their reward for performance. The advantage was in how it was taxed. From 1987, HMRC treated carry as a capital gain rather than as employment income. The headline practical rate was 28%, the higher capital gains rate, against income tax of up to 45% plus 2% National Insurance, a difference of up to 19 percentage points. (Carry could attract a lower 18% or higher 28% CGT rate depending on the band; 28% is the one that mattered for the highest earners.)

This was settled practice, but it was always contested. Dan Neidle of Tax Policy Associates and the Good Law Project both argued publicly that buyout funds are "trading," which should make carry taxable as income. The roughly £600 million a year figure for revenue forgone originates with an independent tax analyst at Tax Policy Associates, who estimated it on the premise that most buyout funds are trading for tax purposes; it was reported by the Financial Times with attribution. In June 2023 the Good Law Project used that figure as the basis of a judicial review against HMRC. Here the public record needs care. The Good Law Project framed HMRC's subsequent position as a concession that buyout-fund carry would be taxable as trading income, and projected that recharacterisation could raise about £420 million a year, on the basis that buyout funds are around 70% of the industry. HMRC's statement was qualified, and Dan Neidle argues the "£600 million loophole" does not really exist, because most carry is a genuine capital gain. The £600 million and £420 million are the Good Law Project's estimates, and the underlying point is a real, unresolved dispute, not a closed case.

What is not in dispute is the legislated reform. From the October 2024 Budget:

• From 6 April 2025, the capital gains rate on carried interest rose from 28% to 32%, an interim step.
• From 6 April 2026, carry is reclassified as trading profit, taxed under income tax plus Class 4 National Insurance. A 72.5% multiplier applies to "qualifying" carry (funds with an average holding period of at least 40 months), producing an effective rate of about 34.1% for additional-rate payers. Non-qualifying carry can face the full rate of up to 47%.

Notably, the reform stopped short of the full income-tax treatment Labour had campaigned on, settling on the 32% step and then the roughly 34.1% effective rate, which prompted criticism that the industry's input had softened it. The OBR's January 2025 costing expected almost no revenue in the early years (around minus £5 million through 2027 as the industry adapts) rising to roughly £80 million a year by 2030.

The arbitrage underneath both

The thread linking these to the corporate story is simple. A company can pay a low effective rate. Separately, the person who owns or runs the capital can have their personal reward taxed more gently than a wage: as a foreign remittance that never arrives, or as a gain rather than as pay. A salaried employee has neither option. They pay income tax and National Insurance on every pound, in the year they earn it, with nothing to reclassify and nothing to keep offshore. The advantage is not that the wealthy work the rules harder. It is that a different rule book applies to them in the first place.