What the Extra 2% Property Income Tax Means for Landlords

Thousands of landlords will pay more tax next year. That’s the short story.

Landlords could have been forgiven for thinking they already knew what was coming – although when it comes to Budget Day, landlords tend to expect something.

But the reason there might have been room for doubt this year is that at last year’s Budget it was announced that, from April 2027, new rates of Income Tax would be applied specifically to property income: 22% for basic-rate taxpayers, 42% for higher-rate taxpayers and 47% for additional-rate taxpayers, up from 20%, 40% and 45% respectively.

Some optimistic voices out there were suggesting this could be reversed – something that would have been seen as a bit of a windfall, even though the increase had not yet kicked in.

Instead, John Healey’s first Budget as Chancellor added another two percentage points.

That means that from 6 April 2027, the rates applying to property income will instead be 24%, 44% and 49%.

Put another way, compared with the Income Tax rates landlords pay today, the tax rate on property income is effectively rising by four percentage points.

Of all measures in the Budget last Wednesday, this is one that stands out for those involved with property, and especially for private landlords.

We thought we should take a look at what it means, how it will affect landlords in particular – and, importantly, what not to do about it.

What does this tax mean in pounds and pence?

The important point is that we are talking about taxable property income, which really means taxable property profit. It doesn’t mean simply taking 24%, 44% or 49% of the rent that comes through the door.

Allowable expenses for maintenance and fees, any other personal income and the individual’s tax position all come into the equation. For individual residential landlords, mortgage interest cannot be deducted when calculating taxable rental profit. Instead, relief is given separately through a basic-rate tax reduction.

That distinction can be particularly important for mortgaged landlords, whose taxable property profit may be considerably higher than the actual cash profit they are left with after paying their finance costs.

But simplified examples demonstrate the effect.

If £10,000 of taxable property profit falls wholly within the basic-rate band, tax at today's 20% rate would be £2,000.

At the 24% property rate from April 2027, it would be £2,400.

So, £400 more tax each year than under today's rate – £200 of which results from the additional increase announced in this Budget.

But it doesn’t particularly matter which income tax band any property income falls into. As the extra 2% is across the board, it means an extra £200 for every £10,000 of taxable property income falling within the relevant band – or, let’s remember, an extra £400 for every £10,000 of taxable property income from April 2027, compared to the tax payable today.

Something else that is important to remember is that this applies to individuals and partnerships receiving property income. A limited company paying Corporation Tax on its rental profits operates under a different tax regime and is not affected by this particular change to property Income Tax.

Can landlords put the rent up to cover the extra tax due?

Some landlords will inevitably feel a temptation to put rents up to cover the extra tax they will be paying under the new regime. But landlords need to be careful.

Since the Renters' Rights Act changes came into force in May, rent increases in England are more formally tied to the open-market rental value of the property. Landlords generally use the Section 13 process, giving at least two months' notice, and can increase the rent only once a year. A tenant who believes the proposed figure exceeds the open-market rent can challenge it at the First-tier Tribunal.

Crucially, the tribunal is not there to decide whether a rent increase itself is fair or unfair. It is there to rule what the property should reasonably achieve on the open market, using comparable evidence.

That might sound like the same thing, but we have already seen tribunal decisions that show why that distinction matters. Government guidance explicitly acknowledges that a tribunal's determination can leave the market rent at the same level – or even lower. And that happened this month, with a case in Manchester ruling that instead of a rent increasing by £50 per month, it should instead be reduced by £200 per month. Instead of receiving an extra £600 a year, the landlord was left receiving £2,400 a year less than before – a £3,000 annual swing against the rent they had proposed.

Open market rent should determine the rent a landlord and their agent sets. An extra tax bill is not a reason in itself to justify a rent increase.

It doesn’t mean that landlords shouldn’t increase their rent at the next review, but before proposing one, it is ever more important to compile good evidence showing what comparable properties are actually achieving.

What is the extra tax paying for?

The Treasury estimates that this latest increase in property Income Tax will raise around £575 million in 2028/29, before settling at roughly £435–£455 million a year later in the forecast.

That money isn't specifically ring-fenced and labelled "landlord tax".

Instead, the Government says the increases to tax on both property and savings income form part of the revenue being raised to fund wider support for households and businesses while maintaining what it describes as fiscal discipline.

The Budget includes support with energy costs, household payments, fuel duty measures and assistance for businesses facing higher costs.

That may explain the Chancellor's thinking. It will obviously do rather less to reassure landlords.

Because however the money is ultimately spent, one thing is undeniable: from April next year, individual landlords will once again be expected to shoulder more of the tax burden – and history tends to suggest they will not be thanked for it.

What should landlords do instead?

We’ve highlighted what not to do: don’t raise rents arbitrarily to cope with the tax increase – not without being able to justify a rise based on open market rent in reality.

But what should landlords do?

First, a reality check: for many private landlords, the answer will be nothing at all.

If you own one or two properties in your own name, with modest profits and a mortgage you’re comfortable with, an extra two percentage points is unwelcome but (probably) manageable. It means a little more to pay through your Self Assessment return on the profit you make from property: £200 more for every £10,000 of taxable profit, on top of the increase already announced. That’s a cost to factor into your figures. It isn’t automatically a reason to restructure.

Moving property into a different ownership structure can carry costs of its own, sometimes significant ones, so the tax saving has to be weighed against them. For other landlords, though, this may be one more reason to look at how their portfolio is held. The options include:

Holding property through a limited company. Companies pay Corporation Tax on rental profits rather than Income Tax, so they aren’t affected by this change. Company ownership also treats finance costs differently, which can matter for heavily mortgaged portfolios. But moving existing properties into a company can trigger Capital Gains Tax and Stamp Duty Land Tax. Borrowing terms differ too. Getting money out of the company, usually as dividends or salary, is taxed in its own right. For many landlords, a company makes more sense for new purchases than for restructuring an existing portfolio.

Reviewing who owns what. Where a property is owned jointly, or could be, the way profits are shared between the owners can affect the overall tax paid. Transfers between spouses and civil partners are generally free of Capital Gains Tax, but any arrangement has to reflect genuine beneficial ownership, and HMRC will expect the paperwork to back it up.

Making sure your numbers are right. Often the simplest saving is the least glamorous: checking that every allowable expense is being claimed, and that the property income you report is actually your taxable profit and not simply the rent received.

Reviewing the portfolio itself. Some landlords will use this as a moment to ask which properties earn their keep after tax, mortgage costs and regulation. For a few, the right answer may be to sell, but with Capital Gains Tax and tenant considerations involved, that’s a decision to take carefully.

None of these is a quick fix, and the right answer depends on your income, your borrowing, how many properties you own, how long you plan to keep them and what you want from them in future. So before you do anything, speak to an accountant or tax adviser who understands property. Ask them to model the numbers for your own situation, including what you’d pay today, what you’ll pay from April 2027 and what each alternative would really cost to put in place.

Because while a tax change like this can be a prompt to look again at how you hold property, it shouldn’t be a reason for a hasty decision.

One Final Thought

This first Healey Budget seems very much a ‘business as usual’ Budget; we called it a ‘Baby Steps’ Budget ourselves, on the day. A scattering of small measures, nothing brutal, nothing that feels like a giveaway.

Nevertheless, for private landlords who already feel put-upon – not just by tax changes but by legislative reform and pending new EPC requirements yet to be confirmed – this particular announcement in the Budget will feel like it backs.

The best advice is to take a practical assessment of what it means for you, be clear and well-documented to show the true taxable profit on your rental, avoid getting taxed on the rent itself, and seek advice. If now is the time to do something different or structure your portfolio differently, consider doing it.

We can tell you that rental demand is here to stay, and investment in property is still a sound exercise as a result. But let’s make sure it works for you as well as it can do, and that you don’t inadvertently leave money on the table.

If you would like any advice on your property or portfolio, please get in touch with our team.