Changes to Property Tax Rates – What Landlords Need to Know

Overview of the Upcoming Changes

Unincorporated landlords currently pay income tax on the profits generated from their rental properties at standard income tax rates. However, this system is set to change from 6 April 2027, when property income will be taxed under a separate set of property tax rates.

Unfortunately for landlords, these new property tax rates will be two percentage points higher than the existing income tax rates, increasing the overall tax burden on rental profits.

Current Tax Rates vs New Property Tax Rates

For the tax years 2025/26 and 2026/27, unincorporated landlords are taxed as follows:

• 20% on profits within the basic rate band

• 40% on profits within the higher rate band

• 45% on profits within the additional rate band

From 2027/28 onwards, rental profits will be taxed at the newly introduced property tax rates:

• 22% basic rate

• 42% higher rate

• 47% additional rate

These changes apply only to unincorporated landlords. Landlords operating through a limited company will continue to pay corporation tax on their profits, which remains unaffected by this reform.

Treatment of Mortgage Interest and Finance Costs

Unincorporated landlords are currently able to claim relief on mortgage interest and other finance costs through a basic rate tax reduction, rather than as a direct expense deduction.

Once the new property tax regime begins on 6 April 2027, the tax reduction will be calculated using the new basic property tax rate of 22%, instead of the current 20%.

Changes to Personal Allowance Allocation

Another important reform from 2027/28 relates to how personal allowances are applied.

At present, allowances and reliefs are allocated in a way that provides the most tax-efficient outcome for the taxpayer. From April 2027, this approach will change.

The personal allowance will first be applied to:

• Employment income

• Trading income

• Pension income

These income sources are taxed at 20%, 40%, and 45%, before being set against property or savings income, which will be taxed at the higher property rates of 22%, 42%, and 47%. This change may further increase the tax payable on rental income.

Managing the Impact of Higher Property Taxes

The Renters’ Rights Act 2025 will restrict how much landlords can increase rents, limiting their ability to offset higher tax costs through rental increases. Landlords planning rent adjustments before these restrictions take effect may wish to consider the future tax implications carefully.

Most unincorporated landlords with rental income below £150,000 use the cash basis for their accounts. Under this method:

• Income is taxed when received

• Expenses are deducted when paid

Where practical, landlords may consider bringing rental income forward so it is received before 6 April 2027, allowing it to be taxed at the lower current rates. Conversely, deferring expenses until on or after this date could result in tax relief at the higher new property tax rates.

Further Guidance

For official guidance on these changes, landlords can refer to HMRC’s publication available on the UK Government website:
www.gov.uk/government/publications/changes-to-tax-rates-for-property-savings-and-dividend-income

                                                         For more information, Book a Free Consultation