Rewarding and managing teams in ’26

Tax on carry

From 6 April 2026, the UK will tax carried interest as trading income, although the usual 47% rate will be discounted to 34.1% (provided the fund holds its assets long-term).  Even with the discount, the UK will have the highest effective rate of carried interest tax across mainstream European jurisdictions, and there will be real complexity for senior individuals visiting the UK. The UK approach contrasts with that of Luxembourg, where 2026 is the first year to which its revamped carried interest tax regime, designed to attract executives to the country, applies. The press has already highlighted some high-profile recent departures from the UK of private capital heavyweights, and Luxembourg will no doubt be hoping that its new rules push it to the top of the list of destinations for other executives looking to emigrate.

However, in the UK, implementation will be the focus now for businesses, with modelling asset holding periods, updating carry documents and stress-testing international arrangements being high priorities.  

LLP members

Aside from carried interest, GPs will be hoping for greater clarity on the UK tax treatment of executives – particularly members of UK LLPs. The current uncertainty has mainly been caused by two series of cases that have been working their way through the courts. This may be resolved this year, as Supreme Court decisions are expected in both series.

First up should be a ruling on the “miscellaneous income” tax charge, as the Supreme Court hearing (in the HFFX case) happened last year. This charge had generally been considered limited in scope, but, since 2020, HMRC has had complete success before the courts in applying it to a fairly aggressive remuneration scheme used by certain hedge funds. The lack of judicial sympathy for that planning is not surprising, but the decisions have opened the door to the charge being applied to more innocuous remuneration arrangements – and we are increasingly seeing HMRC invoke it in relation to returns that executives had considered capital or non-taxable in nature. We don’t expect the Supreme Court to overturn the lower courts, but it will be interesting to see if it sheds any further light on the scope of the miscellaneous income provisions.

We are also likely to get the Supreme Court’s take on the UK’s salaried member rules this year, as a hearing in the BlueCrest case is scheduled for later this month (so we expect a decision later in 2026). The salaried member rules set out whether a member of a UK LLP should be self-employed or an employee for tax purposes, by testing three aspects of ‘partner’ status. BlueCrest will consider one of these in particular – “significant influence” over the affairs of the LLP.   

After taxpayer success in the lower tribunals, in something of a surprise judgment last year, the Court of Appeal found in favour of HMRC.  Notably, the Court took a narrower view than even HMRC had argued as to when an individual can have significant influence, holding that it has to be derived from legal rights and duties and indicating that it is confined to strategic influence over the affairs of the LLP generally (so not just over specific business lines). GPs will be hoping for some softening from this position by the Supreme Court as salaried member status is costly: the employer social security rate is currently 15%.

Non-financial misconduct

From September 2026, bullying, harassment or violence in the workplace (or failure to prevent such behaviour) could breach the FCA’s rules on conduct.

The FCA has also finalised new rules on whether serious non-financial misconduct (including in an individual’s private life) should go to whether they are “fit and proper” to work in an authorised firm.  Firms will need to ensure that they have processes for dealing with incidents and this is likely to require some difficult judgement calls.

NDAs and harassment

UK employers must already take reasonable steps to prevent sexual harassment at work, including by third parties such as suppliers. In October 2026 employers will become liable for harassment (of any kind, including harassment relating to gender, race, disability and religion/belief) of staff by third parties, so businesses will have to carry out risk assessments and update their terms with third parties.

Additionally, employers will soon be prevented from using confidentiality clauses to stop employees disclosing information about harassment or discrimination. This could have an impact on settlements where both parties want to maintain confidentiality given the sensitivities involved. Parties may be less incentivised to settle if they cannot be sure that the details will remain private.

Pay and transparency

Larger employers are required to report gender pay gap figures: from April 2027, they will have to commit to an action plan to tackle the gap (with a transitional ‘voluntary’ year in 2026).

Employers will also be required to report annually on the disability and ethnicity pay gaps in their workforce. This is not expected to come into force before 2027, but there is inherent complexity in the practicalities of collecting this data and holding it in compliance with data protection rules, so it will need some advance thinking. 

The EU has followed suit and is introducing gender pay gap disclosures for larger employers in 2026. If a business’ gender pay gap is greater than 5%, then a pay audit will be required. Employers will have also to provide certain pay information to their workforce and to job applicants.

Employment terms

More employees will gain unfair dismissal protection as the current two year qualifying period will be reduced to six months, from 1 January 2027 and in addition the cap on compensation will be removed (currently the maximum compensation is the lower of a year’s pay and £118,223). And, from October 2026, employers will only be able use “fire and rehire” to change employment terms if the business is in serious financial difficulties. Employers will need to revisit their employment contract terms to build in as much flexibility as possible and may want to consider bringing forward any planned restructurings.

The government is also planning to reform the law on non-compete clauses. It is considering a range of options, including banning them altogether (or at least for employees earning below a certain salary). We should find out more this year.

Travelling in Europe

Individuals visiting the US are now used to the pre-arrival ESTA process. In late 2026, thirty European countries will launch their own version for non-EEA visitors without a visa or residence permit.

The UK has already rolled out its own ‘Electronic Travel Authorisation’ (ETA) scheme which will continue to operate separately, so travellers to Europe may need both an ETA and an ETIAS.