Landlords to bear the brunt of Healey’s tax rises

Landlords, along with savers, will pay an extra 2 per cent on income tax from April 2027.

By Tom Entwistle, LandlordZONE

Landlords and savers have been singled out yet again. In today’s budget, Chancellor John Healey added a further two percentage points to the separate income tax rates on property and savings income.

That comes on top of the two points Rachel Reeves announced in her last budget last November. When both increases come into effect on 6 April 2027, an individual landlord’s rental profits tax will jump to 24 per cent, 44 per cent and 49 per cent for basic, high and higher rate taxpayers, respectively.

That’s four percent points higher than today, while that tax earned from working remains the same. The headlines tell only part of the story because the arithmetic for a high-rate taxpayer with a heavy mortgage often tells a different story. 

We’ve seen landlords’ tax positions change many times over the years, but we've never seen landlords targeted specifically to this extent. What changes with the recent budgets is the mechanism used, creating separate “property rates” of income tax, allowing the Treasury to raise incomes without compromising its promise not to hit employees.

What was announced

Last year’s budget had already set the property income tax rates at 22 per cent, 42 per cent and 47 per cent from the same date, so nothing changes until then, but both these rises will arrive together. 

Savings income will also be taxed at these same rates across the UK. The property rates apply in England, Wales and Northern Ireland, while the Scottish and Welsh governments have the power to set their own rates. These changes will be legislated for in the Finance Bill next year, 2026-27.

The Treasury has described the increases as a “fair and proportionate way of seeking more from people with taxable income from assets”. It says 84 per cent of income taxpayers will not be affected and that around half the revenue will come from the wealthiest ten per cent of households. 

The Office for Budget Responsibility (OBR) has said it expects the property tax increases to raise around £400 million per year on average from 2028 to 29. The savings part makes up another £600 million, or £1 billion in total. These figures are said by the government to allow for the fact that more landlords will move their properties into companies, while the OBR says the costings on the revenue from property taxes are “highly uncertain”.

Savers were given some reprieve by having the planned cuts in the cash ISA allowance to £12,000 be cancelled and reverting back to £20,000. Landlords have no equivalent shelter for rental income apart from incorporation. 

The budget also confirms the go-ahead for a consultation on collecting third-party property income data. This points to HMRC wanting more information about rents landlords are receiving from third-party sources, as well as landlords themselves.

Not straightforward

Most examples quoted simply apply the higher rate to a round rental profit. But doing that ignores the fact that many small-scale landlords have mortgages. Under Section 24, individual landlords cannot deduct mortgage interest from their rental profits. 

Instead, they receive a tax credit on their finance costs at the basic rate of tax. This credit will stay in line with the property basic rate, so it will now rise from 20 per cent to 24 per cent alongside the main rates. 

For landlords on the high rate of tax, it is charged at 44 per cent on profit before interest, but relief is given at only 24 per cent, leaving a 20-point gap. The result is some landlords in this bracket will find themselves paying tax when their rental makes a loss. 

As with other taxes, fiscal drag will compound the problem over time. The personal allowance and higher-rate threshold are now frozen until 5 April 2031, so as rents rise with inflation, more basic-rate landlords will find themselves crossing over into the higher band. 

Who ultimately pays

The OBR has been unusually blunt in its assessment. It says these measures will bring “a material reduction in returns to private landlords”. It will also risk, it says, steadily rising in rents, as it discourages new landlords from entering the renting property market. 

Ben Beadle of the National Residential Landlords Association has said that the Chancellor has once “again turned to landlords to fund the public finances and that tenants will pay through higher rents and fewer homes." 

Speaking to Money Mail, Steve Cox of Fleet Mortgages said he expects more landlords, “particularly those with larger portfolios", to consider holding property through limited companies.