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.

BOOK A CONSULTATION

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.