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

Step 2: Taxable profit under Section 24

Under Section 24, interest is not deducted when calculating taxable profit. Instead, a 20% credit is provided.

Step 3: Tax before and after the increase

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

Portfolio tax before and after the rate rise

Net position

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?