Income tax to become even more convoluted!
Significant tax changes are coming for landlords and investors.
From 6 April 2027, the government will introduce higher tax rates on property and savings income, which could materially increase tax bills for many individuals.
If you own rental property, now is the time to understand what’s changing—and how it may affect you.
What’s changing from April 2027?
Under the Finance (No.2) Bill 2026, income tax rates on property and savings income will increase by 2 percentage points:
- Basic rate → 22%
- Higher rate → 42%
- Additional rate → 47%
This represents a significant shift, particularly for higher-rate taxpayers.
Mortgage interest relief: Still restricted
For residential landlords, mortgage interest is not fully deductible.
Instead:
- Finance costs are disallowed as an expense
- A basic rate tax reducer is applied instead
From April 2027:
- This reducer will increase to 22%
While this offers some relief, it still means:
Higher-rate taxpayers will continue to pay tax on profits before interest is deducted
New rules on how income is taxed
Alongside rate increases, the government is introducing new rules on how income is allocated across tax bands.
Key changes:
- Personal allowance and reliefs will be applied first to earned income
- Property income will be treated as the top slice of non-savings income
- Savings income is taxed next
- Dividend income is taxed last
This can push more of your rental income into higher tax bands, increasing your overall liability.
Example: How tax bills could increase
Consider a taxpayer with:
- Salary: £38,000
- Rental income: £36,000
- Dividends: £15,000
Under the new rules:
- A significant portion of property income is taxed at 22% and 42%
- Dividend income is pushed into higher rates
- Even after mortgage interest relief, total tax can be substantial
This demonstrates how income stacking rules can increase tax exposure.
What about Scottish and Welsh taxpayers?
- Savings and dividend tax rates remain UK-wide
- However, Scotland (and potentially Wales) can vary non-savings income tax rates
It remains to be seen whether:
- Scotland or Wales will align with these increases
- Or introduce different rates for property income
This could create further complexity for taxpayers in those regions.
What this means for landlords
These changes come on top of:
- Restrictions on mortgage interest relief
- Removal of furnished holiday let advantages (from April 2025)
As a result, many landlords may find that:
- Profitability is reduced
- Effective tax rates increase significantly
- Cash flow becomes tighter
Should you rethink your property strategy?
With higher tax rates from 2027, it may be worth reviewing:
- Whether your rental business remains viable
- If ownership through a limited company is more efficient
- Timing of income and expenses
- Long-term investment strategy
There is no one-size-fits-all answer—but doing nothing could be costly.
Practical steps to take now
Before April 2027, consider:
- Reviewing projected rental profits
- Modelling your future tax position
- Exploring restructuring options
- Seeking advice before making major decisions
Early planning gives you more flexibility.
Final thoughts
The upcoming changes represent a significant shift in how property income is taxed.
Combined with existing restrictions, many landlords will see:
Higher tax bills and reduced net returns.
Planning ahead is essential to protect your position.
Need help reviewing your property tax position?
At Merranti Accounting, we help landlords:
- Understand upcoming tax changes
- Plan tax-efficient property structures
- Reduce overall tax exposure
If you’re concerned about how these changes will affect you, get in touch with our team today.
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