Landlords have experienced a succession of tax and regulatory changes over recent years and another important change is approaching.
From 6 April 2027, property income will have its own separate Income Tax rates in England, Wales and Northern Ireland. Instead of rental profits simply being taxed at the existing basic, higher and additional Income Tax rates, new property-specific rates will apply.
For landlords, the headline is relatively simple: each property income tax rate will be two percentage points higher than the equivalent standard Income Tax rate.
The new rates for 2027/28 will be:
| Tax band | Current Income Tax rate | Property income rate from April 2027 |
| Basic rate | 20% | 22% |
| Higher rate | 40% | 42% |
| Additional rate | 45% | 47% |
The change was originally announced at the 2025 Budget and has subsequently been legislated for in the Finance Act 2026, with the new rates taking effect from 6 April 2027.
For many individual landlords, this means a straightforward increase in the Income Tax payable on their rental profits. But, as ever with property taxation, the detail matters.
Why is the Government increasing tax on property income?
The Government’s stated objective is to reduce the difference between the tax paid on earnings from work and the tax paid on income generated from assets.
Employees and the self-employed can face National Insurance as well as Income Tax on their earnings. Property income, savings income and dividends do not generally attract National Insurance in the same way. The Government therefore argues that people receiving income from assets can currently pay less tax than somebody generating the equivalent amount through employment or self-employment.
As part of its response, it has increased certain dividend tax rates from April 2026 and will introduce higher rates for both savings and property income from April 2027.
For landlords, however, this effectively creates a new distinction within the Income Tax system. From April 2027, earning £10,000 from employment and earning £10,000 in taxable rental profit will no longer necessarily result in that income being taxed at the same headline Income Tax rate.
How much more could landlords pay?
Because each of the new property rates is two percentage points higher, the initial calculation can appear relatively modest.
For every £10,000 of property income subject to the new rate, the difference is potentially £200 compared with the equivalent existing rate, before taking account of allowances, reliefs, finance costs and the landlord’s wider tax position.
For example, imagine a landlord has £20,000 of taxable rental profit falling entirely within the basic-rate band.
At 20%, the tax attributable to that income would be £4,000.
At the new 22% property basic rate, it would be £4,400.
That is an additional £400 per year.
For a landlord with £30,000 of property income falling within the higher-rate band, a move from 40% to 42% would represent an additional £600 before other adjustments.
And £50,000 of property income falling within the additional-rate band would generate £23,500 of tax at 47%, compared with £22,500 at 45% – a difference of £1,000.
These examples are deliberately simplified. In reality, a landlord’s employment income, pension income, other property income, allowances, expenses, finance costs and other factors will determine where their property income falls within the tax bands.
Nevertheless, they demonstrate an important point: a two percentage point change becomes increasingly significant as a property portfolio grows.
For somebody with one modest rental property, the increase may be manageable. For a landlord with several properties producing substantial annual profit, it could represent another meaningful increase in the cost of operating their portfolio.
The £1,000 property allowance is not disappearing
There is some good news amongst the changes.
The £1,000 property allowance remains unchanged.
Individuals with gross property income of £1,000 or less can generally benefit from the allowance without reporting that property income to HMRC, subject to the relevant conditions. Where gross property income exceeds £1,000, eligible landlords may generally choose between claiming the property allowance or deducting allowable expenses, depending on which treatment is appropriate for their circumstances.
The Rent a Room Scheme is also unchanged. This currently allows qualifying individuals to receive up to £7,500 a year tax-free from letting furnished accommodation in their home, with the threshold halved where the income is shared with someone else.
So the April 2027 reform changes the rates of tax, rather than removing the existing property-specific allowances.
What happens to mortgage interest relief?
Mortgage interest remains an important issue for residential landlords.
Individual residential landlords cannot generally deduct mortgage interest and other finance costs from rental income in the same way that they deduct many other business expenses. Instead, qualifying residential finance costs generate a tax reduction currently calculated using the basic Income Tax rate.
From April 2027, that finance cost relief will also change.
Rather than being calculated at 20%, relief will be provided at the new 22% property basic rate.
That increase provides some offset against the higher property tax rate for landlords with qualifying residential finance costs.
For example, a £10,000 qualifying finance cost would currently potentially generate a £2,000 tax reduction at 20%. At 22%, that reduction would become £2,200.
It does not, however, mean that mortgaged landlords are unaffected by the new rates.
The interaction between rental profits, mortgage interest, the finance-cost restriction and the landlord’s other income can be complicated, particularly for higher-rate taxpayers. Highly leveraged landlords may therefore want to model their expected position rather than simply applying an extra 2% to last year’s tax bill.
There is another change involving your Personal Allowance
One less obvious element of the April 2027 reforms concerns the order in which allowances and reliefs are applied.
From April 2027, general allowances and reliefs, including the Personal Allowance where available, must first be applied against other sources of income such as employment, trading or pension income before being applied against property, savings or dividend income.
Property-specific allowances, such as the £1,000 property allowance, are not affected by this ordering change.
This matters because taxpayers will have less flexibility over how general allowances interact with income taxed at different rates.
For somebody with a salary alongside a rental portfolio, for example, their Personal Allowance will generally be allocated against their employment income before their property income.
Again, the impact will depend entirely on the individual’s overall income position, but it is another reason why simply looking at the new 22%, 42% and 47% headline rates may not tell the whole story.
Who will be affected?
The change principally affects individuals receiving taxable property income.
This could include:
- buy-to-let landlords;
- individuals letting second properties;
- landlords with larger residential portfolios held personally;
- individuals receiving income from commercial property;
- people receiving taxable income from overseas property businesses; and
- certain investors receiving property income distributions.
The definition of property income itself is not fundamentally changing; it is the rate at which qualifying property income is taxed that is changing.
The position for landlords operating through companies is different.
What if your properties are held through a limited company?
The new 22%, 42% and 47% rates are Income Tax rates for individuals. They should therefore not be confused with Corporation Tax.
Where rental property is held within a limited company, rental profits form part of the company’s business income and are dealt with through the Corporation Tax system rather than being charged to the individual property income rates described above.
It might therefore be tempting for some landlords to conclude that incorporating their property portfolio before April 2027 is the obvious answer.
It is not that simple.
Moving properties that you already own personally into a company can have potentially significant tax and financial consequences. Depending on the circumstances, these can include Capital Gains Tax, Stamp Duty Land Tax, refinancing costs and additional legal and administrative expenses.
There is also a second layer of taxation to consider when profits are eventually taken out of the company by the owners, for example through salary or dividends.
A company structure can make sense for some property businesses, particularly where profits are being retained and reinvested, but it is not automatically more tax-efficient for every landlord.
The April 2027 changes make it worthwhile reviewing the question, rather than assuming what the answer will be.
Is this another reason landlords may increase rents?
It is impossible to look at an additional tax cost in isolation from the wider pressures already affecting landlords.
Mortgage rates, maintenance and repair costs, insurance, compliance obligations and regulatory changes all affect the profitability of a rental property. An additional two percentage points of tax on property income adds another cost to that calculation.
Some landlords may seek to absorb the increase. Others may review rents when tenancies permit, reconsider further investment or examine whether particular properties continue to provide an acceptable return.
Tax should not, however, be considered in isolation when making those decisions.
A property producing a strong long-term return may remain a good investment despite paying slightly more Income Tax. Equally, a property with high borrowing costs and limited net yield may look considerably less attractive once the landlord models all of the forthcoming changes together.
The important figure is not simply your rental income. It is what is actually left after tax and all of the costs associated with owning and running the property.
April 2027 brings another important change: Making Tax Digital
There is another reason why April 2027 should already be on landlords’ calendars.
The second phase of Making Tax Digital for Income Tax also begins on 6 April 2027.
Landlords and sole traders whose qualifying gross income for the 2025/26 tax year exceeds £30,000 will generally need to use Making Tax Digital for Income Tax from April 2027. Those with qualifying income above £50,000 based on the relevant earlier tax year have already entered MTD from April 2026.
Under MTD, affected landlords will need to keep appropriate digital records and use compatible software to provide information to HMRC during the year.
That means many landlords could experience two important changes at exactly the same time:
their property income could become subject to the new 22%, 42% or 47% rates, while they may also become obliged to operate under Making Tax Digital.
For landlords who are not yet keeping digital property records, waiting until April 2027 to deal with both changes is unlikely to be the easiest approach.
Should landlords restructure before April 2027?
Whenever tax rates rise, it is natural to ask whether there is something that can be done to reduce the impact. But there is no single strategy that will work for every landlord.
Depending on individual circumstances, it could be appropriate to review ownership between spouses or civil partners, available expenses and losses, financing arrangements, the use of a limited company, pension planning, the timing of expenditure or even whether individual properties should remain within a portfolio.
Each of those options comes with its own rules and potential tax consequences.
Transferring ownership, for example, should never be undertaken simply because one individual’s Income Tax rate is higher. Capital Gains Tax, Stamp Duty Land Tax, mortgage arrangements, beneficial ownership and longer-term estate planning may all need to be considered.
Similarly, selling a property solely to avoid an additional two percentage points of Income Tax could trigger Capital Gains Tax and remove the potential for future rental income and capital growth.
As we frequently tell clients, the tax tail should not wag the investment dog.
The right approach is to understand what the new rules mean for your particular portfolio and then decide whether any action is commercially and financially sensible.
What should landlords do now?
April 2027 may still feel some distance away, but landlords have an advantage precisely because these changes have been announced well in advance, so there is time to plan.
This could include reviewing your current rental profits, forecasting your likely 2027/28 tax position, ensuring you are claiming all legitimate allowable expenses, checking how much mortgage finance cost relief you receive and considering how the new rates interact with your employment, pension or other income.
It is also worth establishing whether Making Tax Digital will apply to you from April 2027, particularly if your qualifying income exceeded £30,000 in the 2025/26 tax year.
Landlords with larger portfolios may find it useful to model several scenarios. What happens if interest rates change? What happens when a fixed-rate mortgage ends? How does the portfolio perform after tax at 42% rather than 40%? Would retaining, refinancing or selling a particular property produce the best overall result?
Those questions are much easier to consider calmly now, rather than shortly before the new rules take effect.
Higher tax does not automatically mean leaving the property market
It is understandable that another tax increase will cause some landlords to question whether remaining in property is worthwhile. For some, a wider portfolio review may indeed lead to changes, but a higher tax rate alone does not determine whether a property is a good or bad investment.
Yield, borrowing, capital growth, maintenance costs, future plans, retirement objectives and the length of time you intend to hold a property all matter. A landlord with little or no borrowing may be in a very different position from somebody with a highly leveraged portfolio, even if their gross rental income looks similar.
The most useful response to April 2027 is therefore not necessarily to sell, incorporate or restructure. It is to know your numbers.
Preparing for April 2027
The new property Income Tax regime represents another significant development for individual landlords.
From 6 April 2027, property income will be taxed at separate rates of 22%, 42% and 47%, while residential finance cost relief will move to 22%. The £1,000 property allowance and Rent a Room Scheme will remain in place.
For many landlords, the additional tax bill in isolation may not appear dramatic. But when combined with borrowing costs, changes to allowances, wider property regulation and Making Tax Digital, the cumulative effect is worth understanding well before the new tax year begins.
At Richard Riley & Associates, we work with landlords ranging from individuals with a single rental property through to clients with substantial property portfolios. We can review how the April 2027 changes are likely to affect your tax position, help you prepare for Making Tax Digital and look at the wider structure of your property interests.
If you are unsure how much more tax you are likely to pay from April 2027 or whether you should be making changes before the new rules arrive, speak to us now. Good planning is usually much easier when it happens before a tax change rather than after it.