How Does the UK Budget 2025 Affect Landlords?
The UK Budget 2025 introduces significant changes to how rental income is taxed, with landlords facing higher tax bills from April 2027. If you rent out property in England, Wales or Northern Ireland, understanding these changes will help you plan ahead and assess the impact on your finances. However, the picture differs considerably depending on whether you operate as an individual landlord or through a limited company.
New property income tax rates from April 2027
The headline change for individual landlords is the creation of separate tax rates specifically for property income. From April 2027, rental income will be taxed at higher rates than other forms of income, with the government introducing three new property tax bands.
Property income tax rates from April 2027:
| Tax band | Current income tax rate | New property income rate | Increase |
|---|---|---|---|
| Basic rate | 20% | 22% | +2% |
| Higher rate | 40% | 42% | +2% |
| Additional rate | 45% | 47% | +2% |
This represents a two percentage point increase across all bands for property income. The changes apply to income tax on rental profits in England, Wales and Northern Ireland, with the government planning to engage with the devolved governments of Scotland and Wales to provide them with the ability to set their own property income rates.
Limited company landlords are not affected by property tax changes
If you own rental properties through a limited company, the new property income tax rates do not apply to you. Limited companies pay corporation tax rather than income tax, and the corporation tax rate remains at 19% for small companies (with profits up to £50,000) and 25% for larger companies, as confirmed in the government's Corporate Tax Roadmap.
Corporation tax rates for limited companies:
| Company profits | Corporation tax rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 to £250,000 | 19-25% (marginal relief applies) |
| Over £250,000 | 25% |
Individual landlord vs limited company landlord:
| Aspect | Individual landlord (higher rate) | Small limited company |
|---|---|---|
| Tax on rental profits | 42% from April 2027 | 19% (on profits up to £50k) |
| Affected by new property tax rates? | Yes | No |
| Mortgage interest relief | 20% tax credit only | Full deduction as expense |
| Extraction of profits | Direct income | Dividends/salary (additional tax) |
| Administrative burden | Lower | Higher |
This creates a dramatic divergence in tax treatment. A higher rate taxpayer holding property personally will now pay 42% on rental profits, whilst a small limited company pays just 19% corporation tax on the same income. This 23 percentage point difference for smaller landlords, or 17 percentage points for those with profits exceeding £250,000, may prompt many landlords to reconsider their business structure, though any such decision involves complex considerations beyond just the headline tax rate.
Whilst limited company landlords avoid the property income tax rise, they should be aware of changes to capital allowances announced in the Budget. From April 2026, the main rate of writing down allowances decreases from 18% to 14%. However, the government is introducing a new first-year allowance of 40% for main-rate assets from January 2026, which partially preserves incentives for investment in equipment and fixtures.
Why the government is raising property taxes
The Treasury's rationale centres on fairness between different types of income. Unlike employment or self-employment income, property income does not attract National Insurance contributions. The Budget document states that those with property, dividend or savings income pay less tax overall than those whose income comes from work.
By increasing taxes on income from assets, the government aims to narrow this gap whilst raising revenue to support public services. The changes are expected to raise £2.2 billion by 2029-30, with around two thirds of this revenue coming from the top 20% of households.
Who will be affected?
Not all individual landlords will face higher tax bills. The majority of taxpayers have no taxable property income at all, and existing tax-free allowances will continue to protect those with lower levels of rental income.
Key allowances and deductions that still apply:
- Personal allowance of £12,570 applies to all income including rental profits
- Allowable expenses can be deducted before calculating taxable profit:
- Maintenance and repair costs
- Letting agent fees
- Buildings and contents insurance
- Utility bills (if you pay them)
- Ground rents and service charges
- Mortgage interest (via 20% tax credit)
- Annual CGT allowance of £3,000 when selling properties
How much more will you pay? Examples of annual tax increases:
| Your tax band | Rental profit | Current tax bill | New tax bill (2027) | Annual increase |
|---|---|---|---|---|
| Basic rate | £10,000 | £2,000 | £2,200 | £200 |
| Higher rate | £20,000 | £8,000 | £8,400 | £400 |
| Additional rate | £20,000 | £9,000 | £9,400 | £400 |
| Higher rate | £50,000 | £20,000 | £21,000 | £1,000 |
The same profits in a limited company:
| Rental profit | Corporation tax (19%) | Corporation tax (25%) |
|---|---|---|
| £10,000 | £1,900 | £2,500 |
| £20,000 | £3,800 | £5,000 |
| £50,000 | £9,500* | £12,500 |
*Marginal relief applies between £50,000-£250,000, so effective rate would be slightly higher than 19%
The impact will be most significant for landlords with substantial rental portfolios or those already paying higher or additional rate tax. These figures assume rental profit after all allowable expenses have been deducted, and for limited companies, do not account for the additional tax due when extracting profits.
Should you consider incorporating your rental business?
The widening tax gap between individual and corporate ownership may make incorporation more attractive for many landlords, particularly those with smaller portfolios who would benefit from the 19% small profits rate. However, this decision involves multiple factors beyond the headline tax rate.
Advantages of limited company ownership:
- Significantly lower tax rate on rental profits (19% for small companies vs up to 47%)
- Full mortgage interest relief as a business expense
- Easier to retain profits within the business for growth
- More flexibility in tax planning
- Can build up funds tax-efficiently for future property purchases
Disadvantages and costs of incorporation:
- Extracting profits as dividends or salary incurs additional tax charges (dividend tax rates are 8.75%, 33.75% and 39.35% from April 2026)
- Transferring existing properties triggers CGT and stamp duty (typically 3% surcharge)
- Higher administrative costs and accounting requirements
- More complex tax reporting and annual accounts needed
- Buy-to-let mortgages for limited companies often carry higher interest rates
- Less flexibility to use properties personally
- Corporation tax profit calculation differs from personal tax, requiring professional advice
Example comparison: £30,000 rental profit
Individual landlord (higher rate):
- Tax on rental profit: £12,600 (42%)
- Profit after tax: £17,400
Limited company (small profits rate):
- Corporation tax: £5,700 (19%)
- Profit after corporation tax: £24,300
- If extracted as dividend: additional £8,213 dividend tax (33.75%)
- Final profit after all taxes: £16,087
This example shows that whilst corporation tax is much lower, extracting profits narrows the advantage. However, if profits are retained in the company for reinvestment, the tax saving is substantial.
For new landlords or those acquiring additional properties, buying through a company from the outset may prove more tax-efficient, especially if you plan to grow your portfolio. However, existing landlords with accumulated gains may find the switching costs prohibitive, and the decision depends heavily on individual circumstances.
What about capital gains tax on property sales?
The Budget 2025 does not introduce new changes to Capital Gains Tax on property sales. However, landlords should be aware that CGT rates on residential property were already increased to 18% for basic rate taxpayers and 24% for higher rate taxpayers at the Autumn Budget 2024.
These rates remain in place, meaning the tax you pay when selling a rental property has not changed in this Budget. The annual CGT allowance, currently £3,000, also remains unchanged. Limited companies do not pay CGT but instead pay corporation tax on property gains at 19% or 25% depending on total profits.
Other Budget measures affecting landlords
Beyond the property income tax changes, several other Budget announcements may affect landlords:
- Energy bills: Average household energy bills will fall by around £150 from April 2026, potentially reducing costs if you pay utilities for rental properties between tenancies
- High Value Council Tax Surcharge: Properties worth £2 million or more will face an annual charge from April 2028, ranging from £2,500 (£2-3m properties) to £7,500 (£5m+), levied on property owners rather than tenants
- Personal tax thresholds: Frozen until April 2031, meaning fiscal drag will push more landlords into higher tax bands as incomes rise with inflation
- Dividend tax rates: Increasing by two percentage points from April 2026, affecting limited company landlords who extract profits as dividends
- Prescription charges frozen: At £9.90 for 2026-27, which may benefit tenants and indirectly support rent affordability
Both individual and limited company landlords will be liable for the High Value Council Tax Surcharge where applicable. The threshold freeze compounds the effect of the property income tax rise for individual landlords approaching or exceeding the higher rate threshold.
What landlord groups and experts are saying
Industry responses to the property tax changes have been critical, with landlord organisations warning that the measures could lead to rent increases as landlords seek to offset higher tax bills. The National Residential Landlords Association and similar bodies have historically argued that tax increases on landlords ultimately affect tenants through higher rents or reduced supply as landlords exit the market.
However, the government maintains that existing allowances will protect those with modest rental incomes, and that the wealthiest landlords should contribute more. The Treasury argues that the changes address a longstanding imbalance where income from assets faces lower effective tax rates than income from employment.
Navigating the changes ahead
With the property income tax changes not taking effect until April 2027, individual landlords have over a year to review their finances and consider their options. Some may wish to reassess whether property investment remains viable given the higher tax burden, whilst others might explore whether incorporation makes sense for their circumstances.
Actions to consider before April 2027:
- Review your total tax position and calculate the impact of the new rates on your specific situation
- Assess whether incorporation could be beneficial, factoring in all switching costs and ongoing implications
- Consider whether you plan to reinvest profits (favouring limited company) or extract income (reducing the tax advantage)
- Check whether you are claiming all allowable expenses to minimise taxable profit
- Model the long-term tax implications over 5-10 years under different structures
- Consider whether rent adjustments will be necessary to maintain investment returns
- Review your overall investment strategy and whether property remains optimal for your portfolio
- Consult with an accountant or tax adviser who specialises in property taxation before making any structural changes
It is worth noting that these tax changes come on top of previous reforms affecting landlords, including the restriction of mortgage interest relief to a 20% tax credit, the removal of the wear and tear allowance, and the 3% stamp duty surcharge on additional properties. The cumulative effect of these measures has significantly altered the economics of buy-to-let investment over the past decade, particularly for higher rate taxpayers operating as individuals.
Limited company landlords, whilst shielded from the property income tax rises, should monitor their own position regarding capital allowances changes and ensure they understand the full tax implications of their corporate structure, including how they extract profits from the business and the impact of the dividend tax increase from April 2026.
Preparing your rental business for 2027
Individual landlords in England, Wales and Northern Ireland will pay more tax on their rental income from April 2027, with rates rising by two percentage points across all tax bands. Those with modest rental income or lower overall earnings will see limited impact thanks to personal allowances and expense deductions, but higher rate taxpayers with significant rental portfolios should prepare for notably higher tax bills. Limited company landlords continue to pay corporation tax at 19% for small companies (profits up to £50,000) or 25% for larger operations, and are unaffected by these specific changes. This creates a substantial tax differential, particularly for smaller landlords, that may influence business structure decisions. With over a year before implementation, now is the time to review your property investments, model different scenarios, consider whether your current structure remains optimal, and seek professional advice to understand your specific situation.
