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 April 2017 - Comments: 11
7:07 AM, 30th November 2025, About 5 months ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 29/11/2025 – 18:39
Thank you. Very good points. The total return from property investments (rental income plus capital appreciation) typically ranges between 5–7% over five years and 70–110% over ten years. By comparison, the S&P 500 has delivered around 90% cumulative returns over five years and 250–300% over ten years. For the current year to date, despite the impact of Trump’s tariff policies and the recent market pullback, the S&P 500 has still achieved a return of 16.71%. That simply reflects the return from buying an S&P 500 ETF. These figures are publicly available, and tools like Google Gemini can provide more detailed data.
Member Since May 2018 - Comments: 2037
1:13 PM, 1st December 2025, About 5 months ago
Reply to the comment left by J CHAPMAN at 28/11/2025 – 21:34
So if the current position is 22% tax credit then if your gross personal income is £50K or less you are in essentially the same position as before. The significant consideration is still the differential tax treatment of interest….
I heard Rachel Reeves try to justify her 2% extra tax on rental income on the basis that a working tenant renting a property would pay national insurance on earnings before having to pay rent, but the landlord renting the property out to the tenant would pay tax at a lower rate than the landlord. This of course is nonsense and it just displays either Rachel Reeves’ lack of any real understanding of economics, or her dishonesty.
Many small portfolio landlords have been in the position that I have of having a buy-to-let property just about break-even after all costs including finance costs. And just as I did, if you are a landlord in that position you look at the cash position, work out how much extra you have to raise the rent to break even and put the rent up.
The effect of Rachel Reeves’ 2% tax increase is that her hypothetical tenant will experience the following in response to Rachel Reeves’ two budgets if the tenant is in a property that is outside a limited company structure:
(1) Because Rachel Reeves increased employers NI and dropped the level at which it was paid in her first budget, the tenant will probably have had his or her salary held down, or lost his or her job, or had his or her hours reduced making the rent harder to afford.
(2) As a consequence of the 2% tax additional tax rise aimed at the landlord (but faced by the tenant) the hypothetical tenant will now face an additional rent increase as the landlord recovers the extra tax in increased rent.
(3) If the hypothetical tenant is self-employed and has a family then whilst (1) will not apply, (2) will still apply and on top of that the tenant is probably about to face the consequences of having to make submissions to making tax digital because the chances are that tenants who earn less than £20K per annum won’t be able to afford family rental properties.
What Rachel Reeves’s has done is both economically and politically incompetent. It makes no economic sense for non-incorporated landlords to be unable to offset their finance costs against rents, as a limited company can, or as a self-employed sole-trader or partnership can. And because this policy was introduced by George Osborne, but really started to bite when interest rates went up (and it was tenants who got bitten) Rachel Reeves could have reversed this policy and blamed it on George Osborne. This government is increasingly keen to blame all its failures on somebody else but this particular opportunity is one that they’ve missed.
It’s the inability to offset interest rates that is the big consideration when considering the pros and cons of limited vs. non-limited company structures. But the other consideration about a limited company structure is:
(1) If you take dividends out of the limited company then you will now face an ADDITIONAL tax at 2% on that income.
(2) BUT you will only face that additional tax WHEN you take that money out. And so the other consideration in favour of a limited company is that you might be able to either (a) pay into pensions from that company or (b) wait until there is a change of government to a government that is less hostile to business and families than this government is before taking dividends out.
Member Since October 2024 - Comments: 203
7:51 PM, 3rd January 2026, About 4 months ago
Reply to the comment left by Ryan Stevens at 26/11/2025 – 15:57
Gone are the days when the landlords used to increase mortgages to free up more equity to purchase more properties. Now with high rates of interest or for most of us it will be by end of 2027, S24 and in 15 months, tax being 22% or 42%. raising mre finance is just not worthwhile, anymore.
I have started to sell properties since 2018 and reducing the mortgages. S24 does not affect us, as we have only 3 properties between my husband and myself and selling one of them within the next 4 months. Others are in the company name. The last property sale completed in December was in a company name. I am selling 2 properties bought in the company name. So we are selling a total of 3 properties within a year. We will continue to reduce our mortgages, investing elsewhere and spend on travelling.