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Rise in Tax on UK Property Income from 2027 – Landlord Guide
In the Autumn Budget 2025, the Chancellor unveiled a significant change for landlords – a 2% increase in the income tax on property rental earnings. For the first time, the UK will introduce separate tax rates specifically for property income, affecting earnings from renting out land and buildings.
This means that tax on property rental income will no longer be taxed at the same rates as employment or trading income; instead, it will fall under its own new category from April 2027. Below we break down what this tax on property change entails, why it’s being implemented, and how it may impact landlords and tenants. (Primary keyword: tax on property)
Starting in April 2027, property rental income will be taxed under a new set of rates dedicated solely to property income. This brings property taxation in line with how savings interest and dividends are already taxed under their own rate schedules. The new property income tax rates will be higher than the standard income tax rates by 2 percentage points across each band. In practice, this means:
22% Basic Rate on property income – for rental earnings falling in what was previously the 20% basic band.
42% Higher Rate on property income – for rental earnings in the former 40% band.
47% Additional Rate on property income – for rental earnings in the top band (up from 45%).
These rates (often referred to as the property basic, property higher, and property additional rates) represent a 2% increase in tax on property income at each level compared to current rates. Importantly, landlords will still report rental income through self-assessment as before – it’s only the rate of tax that changes, not the method of reporting.
One notable adjustment is how mortgage interest (finance costs) relief is handled. Individual (unincorporated) landlords currently receive a basic-rate tax credit on their finance costs (such as mortgage interest) rather than a full deduction. Under the new system, this finance cost relief will be given at the new property basic rate of 22%. In other words, landlords will be able to claim a tax credit equal to 22% of their mortgage interest against their rental income tax.
This slightly boosts the relief compared to the current 20% credit, but it accompanies the higher tax rate on rental profits. Crucially, the existing landlord allowances – like the £1,000 property income allowance and Rent-a-Room relief – remain in place and unchanged, softening the impact for those with only small amounts of rental income.
Alongside these rate changes, the government is tweaking how your Personal Allowance applies when you have multiple income sources. From April 2027, your tax-free Personal Allowance (currently £12,570) will be used first against employment, trading, or pension income – not rental income.
This means if you earn both a salary and rental income, your allowance will offset your salary (taxed at 20%) before it offsets any property income (taxed at 22%). This rule ensures the higher tax on property income is actually collected where possible, rather than being negated by the allowance.
The introduction of higher tax rates on property income is driven by the government’s aim to make taxation of income from assets “more fair” relative to income from work. Currently, landlords and investors pay no National Insurance on rental, savings or dividend income, whereas employees and the self-employed do pay National Insurance on their earnings.
The Chancellor highlighted that those earning income from property or investments often end up with a lighter total tax burden than someone earning the same amount from a job. By raising the tax on property income by 2% (mirroring the top rate of employee National Insurance, which is 2%), the government seeks to narrow the gap between the tax paid on work versus tax paid on income from assets.
In short, this measure is about tax fairness – ensuring that income from renting property contributes a bit more to the Treasury, similar to earned income.
From a policy perspective, the move also aligns property taxation with the existing frameworks for dividends and savings interest, which have had separate (and slightly higher) tax rates for some years. The idea is that by carving out property income into its own category with elevated rates, the tax system treats asset-based income consistently across the board.
According to official documents, the expected revenue gain from increasing these rates on property (along with parallel rises on savings and dividends) is substantial – on the order of £2.1–2.2 billion annually in total, with roughly £500–£600 million per year coming from the property income changes alone. These funds, the government argues, will help bolster public finances while targeting those with unearned income streams.
For landlords, this 2% hike in tax on property income is another financial squeeze on top of several years of tax and regulatory changes. Landlords have already weathered a raft of tax increases in the past decade – notably the phased removal of full mortgage interest deduction (now replaced by the limited basic-rate credit), an extra 3% Stamp Duty Land Tax on buy-to-let purchases, and more stringent rental regulations.
The new higher income tax rates on rental profits will further reduce net yields for landlords. In practical terms, a landlord who is a basic rate taxpayer will see their tax on rental profits jump from 20% to 22%, reducing their take-home income from rentals. Higher and additional rate landlords face a similar 2% absolute increase in their rental income tax bills (e.g. 40% to 42%, 45% to 47%).
Possibly. Many in the industry are concerned about the knock-on effects. With slimmer margins, some landlords – especially those with mortgages and high expenses – may decide that buy-to-let is no longer worth it and opt to sell their properties. In fact, even before this announcement there has been an ongoing trend of small landlords exiting the market due to tax and legislative pressures. An increased tax on property income might accelerate that trend. Fewer rental properties available could tighten the housing supply for tenants.
When landlords face higher costs, those costs can get passed on. The Office for Budget Responsibility (OBR) has indicated that a portion of this tax rise is likely to be passed through to tenants in the form of higher rents. If many landlords raise rents to compensate for paying an extra 2% in tax, renters could feel the squeeze with rent increases. Landlord associations have warned that clobbering landlords with further taxes ultimately hits tenants, as it disincentivizes investment in rental properties and could push up rental prices in the long run.
On the other hand, some experts note that the finance cost relief at 22% will marginally help basic-rate landlords by giving a slightly larger tax credit on their mortgage interest. This could offset a bit of the pain for those with interest costs, though it won’t eliminate the overall increase in taxes due.
The change applies to unincorporated landlords (individuals or partnerships owning property). It will affect anyone earning rental income above the £1,000 property allowance or using the Rent-a-Room scheme. The government estimates that around 10% of UK taxpayers have taxable property income – meaning the vast majority of people (around 90%) won’t directly pay this tax on property income because they either don’t rent out property or their rental income is fully covered by allowances.
However, for the hundreds of thousands of active landlords (over 2.8 million individual landlords declared rental income in 2023-24), this change represents a significant new cost.
It’s important to note that these income tax changes are being made by the UK government and thus directly apply to England, Wales, and Northern Ireland. Income tax on property income is a devolved matter in Scotland, so Scotland’s government will decide whether to mirror this 2% increase for Scottish taxpayers. (Scotland currently has its own income tax bands and rates for earnings, which include rental income.) Wales also has devolved income tax powers, but to date it has aligned its rates with England’s.
As such, unless the Welsh government chooses a different path, Welsh landlords should expect the same 22%, 42%, 47% property tax rates to apply from 2027. If you are a landlord in Scotland, keep an eye on the Scottish Budget for any equivalent tax on property income announcements.
With a few years before the changes kick in (April 2027), landlords have time to plan and adapt. Here are some steps and considerations to navigate the coming rise in property income tax:
If you derive significant income from rentals, anticipate that from 2027-28 onward your self-assessment tax bills will increase. For example, for every £10,000 of taxable rental profit, a basic-rate landlord will pay £200 more in tax than before. It’s wise to set aside a slightly larger portion of your rental income now to cover future liabilities, or at least be mindful of the impact on your cash flow.
With the prospect of higher taxes, take the opportunity to review each property’s finances. Properties that are barely breaking even or yielding low returns might become loss-making once the 2% extra tax is applied. Consider whether rent increases (where market-justified) or cost cutting are feasible to maintain profitability – but also be conscious of keeping good tenants happy. In some cases, unloading underperforming properties might be a prudent move before 2027.
One avenue landlords discuss is incorporation – transferring properties into a limited company structure. Company-owned rental income is subject to corporation tax (currently 25%) rather than personal income tax rates, and companies can still deduct finance costs fully against rental profits. The 2% hike in personal tax on property income makes the gap between personal tax and corporation tax wider, potentially making incorporation more attractive. However, incorporation is not a simple decision: selling properties to your own company can trigger capital gains tax and Stamp Duty, and incorporation reliefs (to defer gains) are complex and from April 2026 will no longer apply automatically.
Moreover, while the company pays 25% tax on rental profits, you’d then face dividend taxes if you want to extract those profits for personal use. In short, think carefully before incorporating – it may benefit those with large portfolios intending to reinvest earnings, but it’s not a one-size-fits-all solution. Always get professional tax advice to crunch the numbers for your situation.
Make sure you’re taking full advantage of any available reliefs. The £1,000 property allowance can cover small amounts of casual rental income (for example, if you occasionally rent your driveway or a room). The Rent-a-Room scheme still lets you earn up to £7,500 tax-free from lodgers. If you incur legitimate expenses wholly and exclusively for your rental business (repairs, insurance, agent fees, etc.), continue to claim those to reduce your taxable profit. Every deduction will matter more when tax rates are higher.
Since mortgage interest is only relieved at 22%, landlords effectively pay higher-rate tax on interest costs beyond that credit. In a high interest rate environment, financing costs eat heavily into profits. Shop around for better mortgage deals or consider fixing rates if you’re worried about interest costs – reducing your interest expense is one way to mitigate the impact of the tax increase.
By proactively planning, landlords can soften the blow of the upcoming tax on property income rise. Each landlord’s situation is unique – involving considerations of income levels, mortgage status, future plans, and more – so a tailored approach is essential.
Taxation on property can be complex, especially with new rules on the horizon. At Naail & Co, our team of chartered accountants and tax advisors is here to help you navigate these changes confidently. We have extensive experience advising landlords and property investors on tax-efficient strategies – from optimizing deductions to evaluating incorporation or other restructuring options.
Get in touch with Naail & Co to book a free initial consultation. We’ll review your portfolio and personal circumstances, explain your obligations under the new rules, and work with you to develop a plan to minimise your tax burden while staying fully compliant. Early planning can make all the difference. Whether you own one buy-to-let or a large property portfolio, our experts can provide clarity and peace of mind.
Don’t wait until the new rates hit your pocket. Contact Naail & Co today for proactive advice on the Budget 2025 property tax changes and ensure you’re prepared for April 2027 and beyond. We’re here to help you keep your property investments profitable and your tax affairs in order, so you can focus on what matters most – growing your wealth and achieving your financial goals.
From April 2027, the UK government will introduce a separate income tax structure for rental earnings. This means landlords will pay a higher tax on property income—set at 22% for basic rate, 42% for higher rate, and 47% for additional rate taxpayers.
Landlords will pay 2% more in income tax on rental income across all bands. For example, a landlord previously paying 40% will now pay 42%. This rise in tax on property reduces net rental yields and increases annual tax liabilities.
The Chancellor stated that property income is not subject to National Insurance, making it undertaxed compared to employment income. The 2% rise in tax on property aims to close this gap and make the system fairer.
Yes. From April 2027, finance cost relief (e.g. mortgage interest relief) will be given at the new property basic rate of 22%. This slightly increases the relief available to unincorporated landlords under the new tax on property regime.
The changes apply in England, Wales, and Northern Ireland. Property income tax is devolved in Scotland, so Scottish landlords will need to watch for a separate announcement regarding any changes to tax on property income.
Incorporating may help some landlords reduce their overall tax burden, as company profits are taxed under corporation tax rules. However, switching structures has complex implications. Always seek tailored advice before making changes to your property ownership to minimise tax on property legally.
Landlords should review portfolio profitability, set aside funds for future tax bills, explore mortgage refinancing, and claim all allowable expenses. Engaging a tax advisor can help you plan ahead for the 2027 changes to tax on property income.
Higher taxes may lead some landlords to raise rents to maintain margins. If many landlords pass on the cost of the increased tax on property, this could contribute to rent inflation in the coming years.
The increase will hit higher-rate landlords the hardest—especially those with large rental portfolios and high mortgage costs. However, any landlord earning above the £1,000 property allowance will likely feel the impact of the higher tax on property.
Absolutely. Naail & Co specialises in landlord and property tax advisory. Get in touch with us today for a free consultation and expert guidance on how to legally minimise your tax on property and navigate the 2025 Budget changes with confidence.
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