From 6 April 2027, the way rental income is taxed in the UK will change permanently. The Finance Act 2026 introduces dedicated property income tax rates, separating rental profits from the standard income tax calculation for the first time in UK tax history. Every individual landlord holding property in their own name in England, Wales, and Northern Ireland will be affected.
This guide explains what is changing, why it is happening, how it affects your tax bill, and what steps you can take before April 2027 to reduce the impact.
What Is Changing from April 2027?
Before April 2027, rental profits sit in the standard income tax calculation alongside employment, trading, and pension income, all taxed at the same rates. From 6 April 2027, property income has its own separate rates, applied after other income but before savings and dividend income.
The new rates are confirmed in law and apply from the 2027 to 2028 tax year:
| Tax Band | Rate Before April 2027 | Rate From April 2027 |
|---|---|---|
| Basic Rate | 20% | 22% |
| Higher Rate | 40% | 42% |
| Additional Rate | 45% | 47% |
The 2% increase across all bands was announced by Chancellor Rachel Reeves at Budget 2025 on 26 November 2025 and received Royal Assent in the Finance Act 2026. HMRC estimates that approximately 2.4 million landlords will face a higher tax bill as a direct result.
Why Is the Government Doing This?
The stated rationale is the National Insurance gap. Employees pay National Insurance on wages, and the self-employed pay it on trading profits, but landlords pay no National Insurance on rental income.
Adding two percentage points to each property income tax band is the government’s mechanism for narrowing the effective tax difference between earned income and rental income. The Office for Budget Responsibility estimated that the combined changes to property, savings, and dividend income tax rates will raise over £2.3 billion annually by 2030 to 2031. This signals the government’s intent to treat asset income more like earned income going forward.
The Personal Allowance Ordering Change
Alongside the rate increases, from April 2027 there is a significant change to how the Personal Allowance is applied in the Income Tax calculation.
Currently, taxpayers can apply the Personal Allowance (£12,570) against whichever income sources are most beneficial to them. From April 2027, HMRC will require the Personal Allowance to be applied against employment, trading, or pension income first. Only if those sources of income are insufficient to absorb the full allowance will any balance carry across to property income.
Consider a landlord earning £20,000 from employment and £10,000 from property. Under the current rules, they could allocate part of the Personal Allowance against property income. From April 2027, the full £12,570 allowance is applied against the £20,000 employment income first, leaving the entire £10,000 rental income taxable at 22%.
How Section 24 Interacts with the New Rates
Section 24 of the Finance (No. 2) Act 2015 prevents individual landlords from deducting mortgage interest as a business expense. Instead, they receive a tax credit equal to the basic rate of tax applied to their finance costs.
From April 2027, the Section 24 finance cost credit will rise from 20% to 22%, in line with the new property basic rate. For basic-rate taxpayers, this broadly maintains the current position. For higher-rate landlords, however, the new 42% rate is applied to gross taxable rental income, and the credit only offsets 22% of finance costs. The 20 percentage point gap between the tax rate and the credit remains unchanged, but the absolute tax cost increases because a higher rate is now applied to the same rental income figure.
Who Is Affected?
The new rates apply to individual landlords, including partners in property partnerships, who hold residential property in their own name in England, Wales, and Northern Ireland and who report rental income through Self Assessment.
The changes do not apply to:
- Landlords operating through a limited company, who continue paying Corporation Tax at 19% (profits up to £50,000) or 25% (profits above £250,000)
- Scottish landlords, where the Scottish Parliament retains the power to set devolved income tax rates for Scottish taxpayers
- Property held in trusts or as part of pension arrangements, which remain subject to their own tax rules
What Will the Increase Cost in Practice?
The 2% increase is modest in percentage terms but meaningful in cash terms for landlords with significant rental income.
A higher-rate landlord earning £20,000 net rental profit each year currently pays £8,000 in Income Tax on that income (40%). From April 2027, the same landlord pays £8,400 (42%), an additional £400 per year. For a landlord with £60,000 net rental profit across a portfolio, the additional annual cost is approximately £1,200 at the higher rate.
When combined with the continued freeze on Personal Allowance and higher rate thresholds until at least 5 April 2031, the practical effect is that more of each landlord’s rental income will be pulled into higher tax bands over time, even without any rent increases.
Planning Steps to Consider Before April 2027
The time between now and April 2027 is the window for structured tax planning. A number of legitimate strategies can reduce exposure to the new rates.
Review your ownership structure. Transferring a share of property ownership to a spouse or civil partner can utilise their Personal Allowance and lower tax band. Assets transferred between spouses or civil partners generally carry no Capital Gains Tax, making this a practical option for many landlords.
Consider incorporation. Operating through a limited company removes exposure to personal property income tax rates. Rental profits are subject to Corporation Tax, and extraction is managed through salary and dividends. The incorporation decision requires careful analysis of Stamp Duty Land Tax on the transfer, Capital Gains Tax on any disposal, and the long-term cashflow implications.
Stress-test your portfolio. Some lower-yield properties may no longer be viable after the rate increase, particularly those carrying significant mortgage debt where Section 24 applies. Identifying those properties now allows strategic decisions to be made about selling or refinancing before April 2027.
Review rent levels. The increased tax burden may justify a rent review on tenancies where rents have not kept pace with rising costs. A modest rent increase can offset a significant portion of the additional tax.
How UK Property Tax Accountants Can Help
The April 2027 changes are not just a tax rate increase. They alter the income tax calculation, restrict Personal Allowance allocation, and interact with Section 24 in ways that affect every landlord’s position differently depending on their income, portfolio size, and ownership structure.
UK Property Tax Accountants specialises in helping landlords navigate exactly these kinds of structural changes. The team can model your specific tax position under both the current and new regimes, identify where the increase will hit hardest across your portfolio, and advise on whether income splitting, incorporation, or portfolio restructuring makes financial sense for your circumstances.
With personal allowance freezes compounding the impact of the rate rises year on year, early planning makes a measurable difference. UK Property Tax Accountants provides clear, practical advice so you are not reacting to a higher tax bill in January 2028 but prepared and positioned well before April 2027 arrives.
Frequently Asked Questions:
Does the April 2027 rate change affect limited company landlords?
No. Limited companies continue to pay Corporation Tax at 19% on profits up to £50,000 and 25% on profits above £250,000. The new property income tax rates apply only to individuals holding property in their own name.
Will the Section 24 mortgage interest credit increase to match the new rate?
The credit will rise from 20% to 22%, in line with the new property basic rate. However, for higher-rate taxpayers, this does not close the gap between the rate charged and the credit received, so the effective cost of Section 24 increases in cash terms.
Does the Personal Allowance change from April 2027?
The Personal Allowance remains at £12,570, but the ordering rules change. The allowance must be applied against employment, trading, or pension income before property income. This can leave more rental income taxable for landlords with lower earned income.
Do the new rates apply in Scotland?
Not automatically. Scotland retains the power to set its own devolved income tax rates for Scottish taxpayers, and the Scottish Parliament will confirm whether to align with or diverge from the new property rates.
When does the change take effect?
The new property income tax rates take effect from 6 April 2027, for the 2027 to 2028 tax year and all subsequent years. The change is already law, having received Royal Assent in the Finance Act 2026.
Is there anything I can do now to reduce the impact?
Yes. Reviewing ownership structure, considering incorporation, stress-testing your portfolio, and reviewing rent levels are all viable planning steps. Specialist advice is strongly recommended given the interaction with Section 24, Capital Gains Tax, and Stamp Duty Land Tax on any restructuring.
