When Rachel Reeves announced her Autumn Budget, many property investors were waiting with bated breath to see how their investments would be affected. There were initial fears that National Insurance on rental income would be announced, but this was avoided with the Chancellor instead making changes to the tax on rental income and introducing a mansion tax.

Both measures were met with derision by landlords, investors, and the NRLA (National Residential Landlords Association), as concerns over reductions in returns and a decline in the supply of rental properties for those unable to buy a home were coupled with worries that rents would increase and make the property market more stagnant than active.

In this blog, we examine landlord rental income tax to see how it may impact your future as a landlord.

How much tax do landlords pay on rental income?

Before the budget was announced, landlords were subject to paying tax on rental income at the standard income tax rates applicable to their tax band. The tax only applies to profits, but your profits are added to other income. This means that your wages, plus rental income, would put you into one of the categories below:

• Basic rate (£12,570- £50,270): 20%
• Higher rate (£50,271-£125,140): 40%
• Additional rate (Over £125,140): 45%

For new landlords, seeing such figures may be alarming, but it is important to remember that you would only pay 45% on any amount above the £125,140 threshold.

Example:

Salary: £80,000

Rental profit: £50,000

Total taxable income: £130,000

In this example, the 45% rate would apply to the £4,860 that is above the £125,410 limit.

With the new budget announcement, these rates saw an additional 2 percentage points added to each.

What is the new landlord tax on rental income?

Each income tax band now sees 2% added to it for rental income, meaning that from April 2027, when these changes become active, landlords will see:

• 22% income tax at basic rate
• 42% income tax at a higher rate
• 47% income tax at additional rate

What is particularly essential for landlords to remain aware of is that income tax reliefs, such as pension contributions and gift aid, will only apply to other income first as of April 2027. This then potentially leaves less tax-free income that can be offset against rental income.

 How will the landlord's rental income tax affect me?

Whilst 2% may sound small, it is likely to have far-reaching consequences.

Higher tax, lower profits

With mortgages still to pay, regulatory charges to cover, and the general upkeep of the property normally among a landlord’s biggest expenses, the 2% will see a substantially larger tax bill for landlords, especially those on the higher or additional rates.

Rent rises

There are many concerns that landlords will be forced to raise rents to offset the losses the tax rise will bring. This could then lead to a twofold problem. Landlords with tenants unwilling to renew their stays, and tenants struggling to find somewhere affordable.

Supply concerns

If landlords find that tax bills are rising to uncomfortable levels and rental yields are no longer what they were, it may become more favourable to sell their property portfolio or at least scale it back. This could see a reduced supply and rises in rent.

What is defined as profit for landlords on a rental property?

Taxable profit for landlords is determined by what remains after your gross rental income has allowable expenses deducted. This leaves a net rental income that can then be added to other income and then taxed.

Allowable expenses that can be deducted from rental income include:

• Letting agent and management fees
• Repairs and maintenance, but NOT improvements
• Insurance (buildings and landlord)
• Safety certificates such as EPC, gas, and electrical
• Accounting and legal fees
• Council tax, utilities and ground rents (if paid by you)

What is NOT classed as an allowable expense is the interest that any mortgage for your buy-to-let property accrues. Instead, a 20% tax credit is applied to the mortgage to help reduce the overall tax bill.

Example:

Rental income: £25,000

Allowable expenses (excluding mortgage): £5,000

Interest on mortgage: £7,000

Taxable profit: £20,000

Tax is then calculated on £20,000 with 20% (22% from 2027) of the £7,000 mortgage (£1,400) deducted from the tax bill as a credit.

Could landlords avoid the landlord rental income tax?

For some landlords, this change could alter the way they view property investment. Especially if they hold multiple properties within a portfolio. When these new rates are applied in 2027, they could see substantial sums added to tax bills, so landlords need to strategise to protect returns. One such way is to put the properties into a limited company. This isn’t without complexities, as we’ll explain shortly, but when possible, it can protect and even enhance profits.

Benefits of landlords forming a limited company

When properties are held within a limited company, they are not liable for personal property income tax rates. Instead, “the company” pay Corporation Tax on its profits. These are currently capped at 25%, a huge 22% lower than the maximum 47% that will apply to those on the additional tax rate applicable from 2027.

Additionally, where mortgage interest is restricted to a tax credit at the basic rate for an individual landlord, when the properties are made into a company, mortgage interest can be deducted in full as a business expense.

However, when taking profits, landlords are taxed twice when the property is held within a limited company. Firstly, as corporate tax and then again as dividend tax. This is different to the way it applies to individual landlords who only pay tax once at the applicable personal income tax rates.

Challenges of moving from being an independent landlord to becoming a limited company

It may sound ideal to move your properties into a limited company and enjoy the tax savings it could bring, but it can be challenging.

Capital gains tax

Transferring a property into a company is seen as asset disposal. This can see very costly CGT added as the property is likely to have increased in value since it was acquired.

Stamp duty

The company buying the property will be required to pay SDLT based on the current market value, and you’d already paid this when you first purchased the property.

Mortgage issues

Buy-to-let properties have their own type of mortgage, and are non-transferable. Landlords can't just form a company and move buy-to-let products into it. Instead, they must negotiate corporate mortgage products, which can be difficult and expensive to acquire.

What should landlords do about the new landlord rental income tax?

Much depends on your strategy for moving forward. For unincorporated landlords (those not operating as a limited company), higher rates on rental income and mansion tax mean that profits could end up with the treasury rather than the landlord.

This points towards the case for incorporation, but the complexities and costs could prove to be challenging and risky. Furthermore, such a move requires expert advice, as failing to transfer to a limited company properly could be seen as tax avoidance and result in substantial penalties.

With this changing and complex landscape for landlords being more turbulent than ever, you may want to sell up. At Bettermove, we enable you to sell your property portfolio quickly and without any fees. We can buy it directly from you or present it to a network of property investors willing to buy some or all your portfolio. Speak to our team today to find out more.