UK landlords will confront a substantial tax increase starting April 2027. Property owners face a 2 percentage point rise on their rental income tax, affecting hundreds of thousands across the country.
This new measure aims to generate approximately £500 million annually for the Treasury from 2028-29.
The tax increase applies universally, pushing property income tax rates to 22% for basic rate taxpayers, 42% for higher rate payers, and 47% for those in the additional rate band.
Average tax-paying landlords could have to pay around £215 extra income tax.
The top 5% of tax-paying landlords will shoulder one-third of this increased burden.
This change arrives during a particularly difficult period. Landlords already face rising costs and stricter regulations.
Should profitability continue its downward trend, more rental property owners may choose to sell rather than adapt to these new tax requirements.
Such decisions could further reduce rental property supply, which has already contributed to significant rent increases throughout 2023 and 2024.
Before the tax changes take effect.some landlords may consider using a limited company (instead of in their individual name) to run their property business.
Government Raises Property Rent Tax by 2% from 2027
Chancellor Rachel Reeves has announced a substantial change to property taxation. The Finance Bill 2025-26 will create separate tax rates specifically for property income, taking effect from 6 April 2027.
Property basic rates will rise to 22%, higher rates to 42%, and additional rates to 47%. Officials estimate this tax change will yield approximately £0.5 billion annually from 2028-29.
The Treasury justifies this decision by pointing to a tax disparity.
Property income earners currently pay less tax than employed or self-employed individuals because they avoid National Insurance contributions.
This change seeks to reduce the gap between tax on work and tax on asset income.
England, Wales and Northern Ireland will adopt these new property income rates. The government intends to engage with Scotland and Wales, offering them the ability to set property income rates alongside their existing Income Tax powers.
The reform restructures taxation order. Property income will be taxed after employment, trading and other income but before savings and dividend income.
Relief for residential finance costs will be calculated using the new property basic rate of 22%.
Landlords Warn of Shrinking Margins and Market Exits
Property industry experts have raised significant concerns about the upcoming tax increase.
The 2% rise appears modest, yet the Office for Budget Responsibility (OBR) warns this measure will substantially reduce returns to private landlords, extending a decade-long decline in profitability.
Basic rate taxpayers face a harsher reality than the headline figure suggests – their property income tax effectively jumps by 10%.
When Section 24 mortgage interest relief restrictions enter the calculation, this apparent 2% increase becomes a 14% drop in real cashflow for typical mortgaged portfolios.
Landlords are already leaving the market. Available rental properties across Britain have dropped to an all-time low of just 284,000 homes – down 18% from the first quarter and 23% below pre-pandemic levels.
Recent research shows 26% of landlords sold at least one property in 2024, while only 8% purchased.
The ratio of homes sold by landlords to those sold by owner-occupiers has surged to 5:1, compared to 1:1 in 2021.
Since 2016, an estimated 400,000 rental homes have disappeared, potentially reaching 10% of the UK’s private rented housing stock.
Tenants May Face Higher Rents Amid Supply Shortages
Tenants may bear the consequences of these tax changes through higher housing costs. The Office for Budget Responsibility explicitly warns that reduced landlord returns will “likely reduce the supply of rental property over the longer run”.
This shortage risks “a steady long-term rise in rents if demand outstrips supply”.
Monthly rent increases of £20 to £25 across England appear likely, with London tenants facing rises exceeding £40.
These additional costs come at a time when rental prices have already reached unprecedented levels – the average advertised rental price across Britain (excluding London) now stands at £1,385 per month.
Competition among prospective tenants has intensified significantly. Many now bid against each other for properties, sometimes offering rent payments in advance just to secure accommodation.
This situation becomes more concerning when considering that Britain needs almost one million new rental homes by 2031.
The government’s impact assessment for this tax increase overlooked how the changes would affect rental supply or housing costs.
Simon Gammon from Knight Frank Finance expects “there will be a drying-up” of supply in the rental sector over the next two years, with the full impact hitting tenants when landlords receive their tax bills in 2026 or 2027.
No National Insurance on rental earnings
The Treasury has confirmed that rental income will not be subject to National Insurance contributions.
Prior to the Budget announcement, there were widespread reports suggesting an eight per cent NIC charge on rental earnings could be implemented to generate additional revenue of £2 billion–£3 billion annually.
Conclusion
This 2% tax increase creates another substantial challenge for landlords already managing higher costs and stricter regulations.
Property owners must decide whether to absorb these additional expenses or transfer them to tenants.
While equalising tax treatment between property income and employment income appears logical, the timing during a housing crisis raises questions.
Basic rate taxpayers face the harshest impact – a 10% effective increase rather than the stated 2%.
Mortgaged landlords may see real cashflow drop by around 14% once Section 24 restrictions apply.
These stark realities explain the continued exodus from the rental market.
Housing market distress is evident. Available rental properties have dropped to record lows, falling 23% below pre-pandemic levels.
This trend will accelerate as tax changes take effect. Tenants now compete intensely for scarce housing, often paying rent upfront to secure properties.
Rental market contraction should accelerate over the next two years. The OBR confirms that reduced landlord returns will shrink rental property supply long-term.
Monthly rents may increase £20-£40 depending on location, placing additional strain on tenants already facing record prices.
Reports suggest that Britain requires nearly one million new rental homes by 2031, yet policy continues pushing private landlords away.
The full consequences will emerge when landlords receive tax bills in 2026-2027, potentially triggering further market disruption and deepening the housing crisis.
Key Takeaways
The government’s 2% tax hike on rental income from 2027 will significantly impact both landlords and tenants, potentially worsening the UK’s housing crisis.
- Basic rate landlords face effective 10% tax increase, not just 2%, with mortgaged properties seeing up to 14% cashflow reduction after Section 24 restrictions.
- Rental supply crisis deepens as available properties hit record lows (down 23% from pre-pandemic), with 26% of landlords selling in 2024 versus only 8% buying.
- Tenants will pay £20-£40 more monthly in rent due to supply shortages, with London seeing the highest increases as landlords exit the market.
- 400,000 rental homes already lost since 2016, yet Britain needs nearly one million new rental properties by 2031 to meet demand.
- Mortgage Interest Relief will continue to be applicable, but at the new basic rate of 22% to align with the revised property income tax rate.
This policy aims to equalise taxation between property income and employment but risks accelerating landlord exits during an acute housing shortage.
The full impact will materialise when tax bills arrive in 2026-2027, potentially triggering further rental market disruption.
Landlord tax rate increase FAQs
Q1. How will the new tax on rental income affect landlords? The new tax will increase the basic, higher, and additional rates of income tax on property rental income by 2 percentage points from April 2027.
Q2. Will tenants be impacted by this tax increase? Yes, tenants may face higher rents due to reduced rental property supply. Experts estimate the tax changes could add between £20 and £25 per month to typical rents in England, and more than £40 in London.
Q3. Why is the government implementing this tax increase? The government aims to narrow the gap between tax paid on work and tax paid on income from assets. Currently, those with property income pay less tax than people whose income comes from employment or self-employment.
Q4. How might this tax change affect the rental property market? The tax increase may lead to more landlords selling their properties, potentially worsening the already shrinking rental property supply. This could result in fewer available rental homes and increased competition among tenants.
Q5. When will these new tax rates come into effect? The new property income tax rates will take effect from 6 April 2027, as part of the Finance Bill 2025-26. The government expects this measure to generate approximately £500 million annually for the Treasury from 2028-29.
