Budget 2025: The real impact of the 2% tax rise on rental income
Don’t be fooled by the “2% tax rise”.
Once Section 24 kicks in, that tiny headline increase turns into a 14% drop in real cashflow for a typical mortgaged portfolio.
We modelled the numbers on an 8-property landlord, and the results are eye-opening.
If you want to understand what the 2027 changes truly mean for your finances, this is essential reading.
Background
The 2025 Budget confirmed that from April 2027, property income will be taxed at higher rates: 22% for basic-rate taxpayers, 42% for higher-rate taxpayers, and 47% for additional-rate taxpayers. The same uplift applies to dividends and savings income.
At first glance, a two percentage point rise appears modest. However, once Section 24 is applied to individual landlords, the effect on real-world cashflow becomes far more significant. Tax is calculated on a profit figure that ignores mortgage interest, and a separate 20% tax credit is given instead. This means that even a small increase in tax rates can translate into a substantial reduction in spendable income.
This article is for illustration only. All calculations use explicit assumptions so landlords can understand the mechanics before speaking with an adviser.
Modelling assumptions
The worked example below uses the following consistent landlord profile:
Portfolio
- 8 properties
- £200,000 average value per property
- £1,600,000 total portfolio value
- 60% loan-to-value (LTV)
- £120,000 borrowing per property
- £960,000 total borrowing
Income and costs
- £1,200 rent per month per property
- £14,400 annual rent per property
- £115,200 total rent across 8 properties
- 20% operating costs (maintenance, voids, insurance)
- £23,040 total operating costs
Finance
- 5.5% interest-only mortgage
- £6,600 interest per property per year
- £52,800 total interest across the portfolio
Tax profile
- Higher-rate taxpayer
- Tax rate rises from 40% to 42% in April 2027
- Section 24 applies (interest not deducted before tax)
- 20% credit applied to mortgage interest
How Section 24 changes the numbers (one property)
Step 1: Cash position before tax
| Item | Amount (£) |
|---|---|
| Annual rent | 14,400 |
| Less operating costs (20%) | 2,880 |
| Cash profit before interest | 11,520 |
| Less mortgage interest | 6,600 |
| Cash profit after interest | 4,920 |
Step 2: Taxable profit under Section 24
Under Section 24, interest is not deducted when calculating taxable profit. Instead, a 20% credit is provided.
| Item | Amount (£) |
|---|---|
| Taxable profit | 11,520 |
| Mortgage interest eligible for 20% credit | 6,600 |
Step 3: Tax before and after the increase
| Stage | Before April 2027 (40%) | From April 2027 (42%) |
|---|---|---|
| Tax on taxable profit | 4,608 | 4,838.40 |
| Less 20% credit on interest | 1,320 | 1,320 |
| Tax payable | 3,288 | 3,518.40 |
Tax increases by £230.40 per property per year. The rise appears small on paper but is amplified significantly because Section 24 inflates taxable profit.
Scaling the example to eight properties
Portfolio cashflow before tax
| Item | Amount (£) |
|---|---|
| Total annual rent | 115,200 |
| Less operating costs (20%) | 23,040 |
| Cash profit before interest | 92,160 |
| Less mortgage interest | 52,800 |
| Cash profit after interest | 39,360 |
Portfolio tax before and after the rate rise
| Stage | 40% rate | 42% rate |
|---|---|---|
| Tax on taxable profit | 36,864 | 38,707.20 |
| Less 20% credit on interest | 10,560 | 10,560 |
| Tax payable | 26,304 | 28,147.20 |
Net position
| Metric | Before April 2027 | From April 2027 |
|---|---|---|
| Cash profit after interest | 39,360 | 39,360 |
| Tax payable | 26,304 | 28,147.20 |
| Net cashflow after tax | 13,056 | 11,212.80 |
Net annual income falls by £1,843.20, a reduction of around 14% despite the headline tax increase being only two percentage points.
What this means for landlords
Under these assumptions, the landlord collects more than £115,000 per year in rent and services almost £1 million of debt, yet ends up with just over £11,000 of post-tax income from eight properties once the 2027 rates apply.
The example shows how demanding the tax environment has become for leveraged individual landlords, particularly when higher interest rates, licensing, maintenance, and capital expenditure are considered. Some properties will remain strong performers, others will become marginal, and portfolio-wide planning becomes increasingly important.
- Some units will still make sense to hold.
- Others may need refinancing or restructuring.
- Some may be better suited to company ownership.
- A few may be candidates for disposal.
From illustration to personalised planning
The example in this article is generic. Every landlord has different interest rates, rents, borrowing levels, maintenance pressures, and family objectives. A structured consultation can apply this framework to your own portfolio
so that decisions are based on numbers rather than guesswork.
A Property118 consultation can:
- Model Section 24, the 2027 tax rise, and different mortgage-rate scenarios using your actual properties.
- Compare “hold, refinance, restructure or sell” options with clear cash-after-tax figures.
- Evaluate whether company structures or Family Investment Companies may help with IHT and long-term planning.
- Produce an action plan for your accountant and solicitor to validate and implement.
If you would like a personalised report, you can request a consultation. The output is a structured document designed to help your advisers focus on confirmation and implementation rather than discovery.
Our consultancy not only covers retirement, business continuity and legacy planning. It can also unlock the lifestyle you once dreamed about but forgot to implement.
⚖️ Important notice – scope of planning support
Where our recommendations touch on areas requiring regulated input, we refer clients to appropriately authorised professionals for advice and execution.
This article and any associated consultation are for information and planning support only. Final tax positions and legal or regulated advice must always be confirmed with appropriately qualified professionals.
Now something only for ‘tax geeks’ like me to ponder
Confession; When I first published this article I was not aware of this. I can’t say for sure when it was published. Nevertheless, tit is now know that the tax credit on Finance Cost Relief will also be increased to 22% in 2027, so I remodelled the numbers. I then went on to consider the same scenario in Limited Companies. Tax professionals will appreciate why. That outcome is very different. Landlords should also be reminded that they probably didn’t invest for rental profit alone, so when comparing returns against other forms of investment, they should also factor in the potential of capital appreciation. See my article entitled; Are You Sure This Is The Right Time To Sell Your Property?
Updated Calculations Based on the New Finance Cost Relief Clarifications
Portfolio profile
- 8 properties
- £200,000 each (total value £1,600,000)
- 60% loan to value
- Total borrowing £960,000
- Interest rate 5.5% (interest £52,800 per year)
- Total rent £115,200 per year
- Operating costs £23,040 per year
- Real cash profit after interest £39,360
1. Personal landlord at 40% tax (current rules)
| Taxable profit under Section 24 | £92,160 |
| Tax at 40% | £36,864 |
| Finance credit (20% of £52,800) | £11,616 |
| Tax payable | £25,248 |
| Net income after tax | £14,112 |
2. Personal landlord at 42% tax (from April 2027)
| Tax at 42% | £38,707.20 |
| Finance credit (22% of £52,800) | £11,616 |
| Tax payable | £27,091.20 |
| Net income after tax | £12,268.80 |
3. Limited Company at 19% Corporation Tax (small profits rate)
| Taxable profit | £39,360 |
| Corporation Tax at 19% | £7,480 |
| Net cashflow after tax | £31,880 |
4. Limited Company at 25% Corporation Tax (upper rate)
| Corporation Tax at 25% | £9,840 |
| Net cashflow after tax | £29,520 |
Summary comparison
| Scenario | Net cashflow after tax |
|---|---|
| Personal landlord at 40% | £14,112 |
| Personal landlord at 42% | £12,268.80 |
| Limited Company at 19% CT | £31,880 |
| Limited Company at 25% CT | £29,520 |
The 2% headline increase is not the main issue.
Section 24 continues to inflate taxable profit for landlords who hold properties personally.
A company pays tax on real profit and remains far less affected. This distinction continues to drive the gap in outcomes between the two routes.
This illustration does not include the tax position when money is drawn from the company.
Extraction planning depends on each landlord’s wider income, pensions, dividend allowances and long term family objectives.
That step should always be tailored with professional advice.
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Autumn Budget 2025 - Landlord Reactions
Member Since January 2011 - Comments: 12209 - Articles: 1405
5:59 PM, 26th November 2025, About 5 months ago
Rerun of the numbers for a Limited Company
The figures below repeat the same example that was used for the individual landlord.
The only change is that the eight properties are held inside a Limited Company where
mortgage interest is fully deductible. All other assumptions remain identical.
Portfolio assumptions (unchanged)
Per property inside a company
Portfolio totals inside a company (8 properties)
Side by side comparison
The real cash position before tax is the same in every scenario.
The difference comes from how the tax rules treat mortgage interest.
Section 24 inflates the taxable profit for an individual landlord.
A company deducts interest in full and pays tax on the real profit instead.
This example is still only an illustration. The next layer of planning is how income
is taken from the company, which depends on each landlord’s wider income, pensions and
family objectives. That step should always be tailored with professional advice.
FURTHER UPDATE – 27/11/2025
It has since occurred to me that if the property company is the landlord’s only company, and its taxable profits remain below the upper threshold, the effective Corporation Tax rate would be closer to the small profits rate (19%) or a blended rate between 19% and 25%, depending on where the profit falls.
Given the model’s taxable profit:
£4,920 per property
£39,360 across the company
This sits fully within the small profits band, meaning the correct Corporation Tax rate is 19%, not 25%, hence the following rerun of the numbers…
Rerun of the numbers for a Limited Company (Updated for 19% CT)
This version repeats the same example used for the individual landlord.
The only change is that the eight properties are held inside a Limited Company
where mortgage interest is fully deductible. All other assumptions remain identical.
Because the company generates only thirty nine thousand three hundred and sixty pounds
of taxable profit, the correct Corporation Tax rate is the small profits rate of nineteen percent.
Portfolio assumptions (unchanged)
Per property inside a company
Portfolio totals inside a company (8 properties)
Side by side comparison
The real cash position before tax is identical across all scenarios.
The difference comes from how the tax rules treat mortgage interest.
Section 24 inflates the taxable profit for an individual landlord.
A company deducts interest in full and pays tax only on the real profit.
This illustration does not include the tax position when money is drawn from the company.
Extraction planning depends on each landlord’s wider income, pensions,
dividend allowances and long term family objectives.
That step should always be tailored with professional advice.
Member Since May 2018 - Comments: 2019
9:19 PM, 26th November 2025, About 5 months ago
I may have missed some of the detail of the budget so can someone please clarify for me?
If you are a non-incorporated landlord then you now face an extra tax bill of 2% but you still can’t offset your finance costs. But a limited company can still offset all of its finance costs.
If you are holding commercial property in a pension then you do not face the 2% tax bill.
And below £50K gross salary whilst you still can’t offset your finance costs you do get a 20% tax credit? Or has that tax credit, in effect, been reduced?
Member Since June 2013 - Comments: 3248 - Articles: 81
7:28 AM, 27th November 2025, About 5 months ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 26/11/2025 – 16:55
Yes that’s what I’m after:
Yes, our modelling can show the impact of placing specific properties into a Family Investment Company and then disposing of others either immediately or in later years. It can also illustrate how the overall position changes if a sale takes place inside the company rather than in your personal name. Each scenario produces a different combination of tax, cash flow and long-term outcomes
Would save me hours & days doing it which I’d never get round to, & paying accountant etc.
I’m not interested in how much CGT I pay now, I know that, it’s roughly 20k per house in personal names.
I’m not interested in if keep this house, will be £2k pa better off than that house.
I’ve sold three this week, one you would have said Ooh don’t sell that Mick.
I’d only walked away with 60k after paying the CGT, yet it was good rental numbers if kept. I’m selling whatever the tenants will allow me, I’ve only got 20 years left on this planet & need to do all the great things in the time left.
But one thing is important to me is Wasting money. If I’ve got to keep so many for 10+ years, then I don’t want to do that inefficiently, nor do I want to put the remaining dozens of houses into a company, to sell 20 in next 2 years & pay double taxation on taking the money back out the company-I know little of how these numbers work.
I’ve completed on 22 sales since May, got around 9 more by mid Jan hopefully.
Ooh yeah I’d forgot about costs of moving it into company too-Good job u on the ball.
Member Since January 2011 - Comments: 12209 - Articles: 1405
8:24 AM, 27th November 2025, About 5 months ago
Reply to the comment left by Mick Roberts at 27/11/2025 – 07:28
Mick, I strongly recommend you book a full consultation because I cannot provide you the level of guidance on a forum without you sharing lots of very detailed information and personal information that I wouldn’t recommend you to post here.
Member Since December 2021 - Comments: 18
10:37 AM, 27th November 2025, About 5 months ago
Hmm – I think part of this is incorrect -> The UK Government website about these changes is here -> https://www.gov.uk/government/publications/changes-to-tax-rates-for-property-savings-dividend-income/changes-to-tax-rates-for-property-savings-dividend-income
This link details the new tax rates for Interest, Property and Dividends.
In this, the “Finance cost relief” is ALSO being set to 22% (see section 2) -> “Finance cost relief will be provided at the separate property basic rate (22%).”
I would say from my calcs, you still pay more, but not as bad as indicated here.
NOTE – Section 24 IS bad for me – my calcs indicate that I will be paying £25K more in tax. vs incorporating my portfolio – the current payback over the SDLT costs is approx 6 years!
Member Since January 2011 - Comments: 12209 - Articles: 1405
10:49 AM, 27th November 2025, About 5 months ago
Reply to the comment left by Si BB at 27/11/2025 – 10:37
Thank you for sharing this. I appreciate you pointing me to the updated material on the Government website. I was not aware of the specific reference to finance cost relief being aligned to the new 22% property basic rate at the time I published the article or in the updates I worked on over-night. Your comment has prompted me to look again at the workings and to update the calculations so that the illustration reflects the most accurate position. I’m working on that now and will remodel the same private landlord, plus two versions for the Limited Company based on 19% and 25% corporation tax. This may take a while to adjust my calculations so please give me an hour or so.
Meanwhile, the underlying point remains the same. The impact of the 2% rate rise depends on whether interest is deductible. A landlord who holds property personally under Section 24 still faces tax on an inflated profit figure. A landlord who holds property inside a company or within a structure where interest is deductible pays tax on the real profit instead. The difference between those two positions is significant.
Member Since January 2011 - Comments: 12209 - Articles: 1405
10:54 AM, 27th November 2025, About 5 months ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 27/11/2025 – 10:49
Those new calculations were much easier to do than I thought. Thankfully I made a decent job of my spreadsheet, so I was able to amend the variables quickly.
Updated Calculations Based on the New Finance Cost Relief Clarifications
Thank you again for highlighting the updated Government guidance.
The illustration has now been rebuilt so that it reflects the correct
finance cost credit of 22%. All four scenarios use the same property,
rent, cost and mortgage assumptions.
Portfolio profile
1. Personal landlord at 40% tax (current rules)
2. Personal landlord at 42% tax (from April 2027)
3. Limited Company at 19% Corporation Tax (small profits rate)
4. Limited Company at 25% Corporation Tax (upper rate)
Summary comparison
The 2% headline increase is not the main issue. Section 24 still inflates taxable profit for landlords who hold property personally. A company pays tax on real profit and is therefore far less affected. This remains the core driver of the difference.
Member Since March 2024 - Comments: 15
11:15 AM, 27th November 2025, About 5 months ago
Mark, I think you left out one important consideration, namely the mortgage interest rate, which is likely to be around 1% higher for a limited company landlord than a personal landlord. This would make a significant difference to your net cashflow comparison, with £9.6k p.a. extra interest. 5.5% (including fees) may be about right for Ltd. Co, but you can get a much better rate than that for personal landlords.
Member Since January 2011 - Comments: 12209 - Articles: 1405
11:31 AM, 27th November 2025, About 5 months ago
Reply to the comment left by Just Be Happy at 27/11/2025 – 11:15
My recent research into that point concluded that, generally, there is no longer a differential in interest rates offered to individual portfolio landlords and those operating via a Limited Company. Further, aside from the differing tax outcomes, underwriting of BTL Limited Company mortgage applications is currently more lenient, particularly in relation to interest cover requirements.
Below are links to a couple of articles I wrote off the back of that research …
1) How Limited Company Buy-To-Let Mortgages Work – LINK https://www.property118.com/limited-company-buy-to-let-mortgages-2025/
2) What Landlords Need to Know About Buy-To-Let Affordability Tests in 2025 – LINK https://www.property118.com/what-landlords-need-to-know-about-buy-to-let-affordability-tests-in-2025/
Member Since December 2017 - Comments: 24
5:44 PM, 27th November 2025, About 5 months ago
Some useful comparisons – one I’m wondering about is
I have 2 unencumbered properties personally owned with wife but we have a very large cheap (1.6%) mortgage on our main house that would be about 60% of the value of the 2 properties.
Should I
A)Keep re mortgaging the main house
B)Take mortgages out on the personally owned rental properties
C)Take mortgage out on company held properties (HMO’s) so expensive to pay off
Appreciate the forums thoughts