From 6 April 2027 your rental income has its own, higher tax rates

From 6 April 2027 rental income stops being taxed at the same rates as everything else. Property income will have its own set of income tax rates — 22%, 42% and 47% — against 20%, 40% and 45% for earned income. The measure was announced at Budget 2025 and is now law: the Finance Act 2026 received Royal Assent on 18 March 2026, and sections 6 and 7 set the property rates for 2027/28. Savings income moves to the same three rates on the same date.

The government's stated rationale is straightforward: property, savings and dividend income bear no National Insurance, so the income tax rates on them are being raised to narrow the gap with earned income. That rationale explains why the increase is two percentage points.

The rates, side by side

The measure applies to property letting income and to property income distributions from investment funds. It addresses individuals, partnerships, trusts and estates.

What happens to Section 24

The finance cost restriction does not go away, and it does not get worse in mechanism. Individual landlords of residential property still get no deduction for finance costs, and still receive a basic rate tax reducer applied at Step 6 of the income tax calculation. The government's technical note confirms that taxpayers will continue to receive relief in this way, but at the property basic rate from 2027/28 — so the reducer rises from 20% to 22%.

The higher reducer is a small offset against a much larger rate rise.

An illustrative example

Take a higher-rate landlord with £30,000 of gross rent, £9,000 of mortgage interest and £6,000 of other allowable costs. Assume the reducer is not capped by either of the other two limbs of the Section 24 test — that is, property profits and adjusted total income are both comfortably above the finance costs. The figures are illustrative.

• Taxable property profit: £30,000 less £6,000 = £24,000. The £9,000 of interest is not deducted.
• 2026/27: £24,000 at 40% = £9,600, less a reducer of 20% of £9,000 = £1,800. Tax of £7,800.
• 2027/28: £24,000 at 42% = £10,080, less a reducer of 22% of £9,000 = £1,980. Tax of £8,100.

An extra £300 a year on a modest two-property portfolio, from a rule change that required the landlord to do nothing at all. Scale it up: on £80,000 of taxable property profit the two extra percentage points are £1,600 a year, and the improved reducer only claws back 2% of whatever the finance costs are. A landlord with £80,000 of profit and £25,000 of interest gets £500 back against £1,600 of extra tax — a net £1,100 a year.

Property companies and the new rates

The measure addresses individuals, partnerships, trusts and estates. Companies are not in it. Corporation tax on property profits stays at 19% on profits up to £50,000 and 25% above £250,000, with marginal relief in between producing an effective 26.5% on profits in the band. Companies are also outside Section 24 entirely — mortgage interest is fully deductible.

So from April 2027 the gap between a higher-rate individual landlord and a company on retained profit widens by two percentage points, on top of a gap that already existed. That strengthens the incorporation case on retained profit.

Incorporating does not solve Section 24. It removes the finance cost restriction, and in exchange it introduces capital gains tax on the transfer at market value as a disposal to a connected person under sections 17 and 18 TCGA 1992, stamp duty on market value under section 53 Finance Act 2003 with the 5-point additional dwellings surcharge, and a second layer of tax when money comes back out — which got more expensive on 6 April 2026, when dividend rates rose to 10.75% and 35.75%. Compared with an individual landlord, a company pays less tax on retained profit and more on extracted profit, and the April 2027 change affects only the retained profit comparison.

What the rise does that the headline does not show

Two second-order effects matter more than the two points themselves.

Gross rent still drives your total income. Because Section 24 taxes rent gross of interest, a heavily geared landlord's total income is inflated well above their real cash profit. That is what pushes people over £50,270 into the higher rate, over £100,000 into the personal allowance taper, and over the High Income Child Benefit Charge threshold. Raising the higher rate on property income to 42% raises the cost of every one of those crossings.

The thresholds are frozen. Personal allowance £12,570, basic rate band to £37,700, additional rate above £125,140 for 2026/27, with the freeze running to 5 April 2031 following Budget 2025. Rents that rise with inflation therefore move landlords up the bands without any decision being taken, and from April 2027 the band they move into costs more.

What to do before April 2027

• Re-run your own numbers at 42% in place of 40%, including the 22% reducer, to see the tax you will pay on your own figures. The Section 24 calculator does the arithmetic.
• Check where you sit against the thresholds, because the crossings cost more than the rate rise itself.
• If you were already weighing a company, run the comparison on the April 2027 rates and get a price for the cost of transferring. The incorporation calculator gives a first estimate.
• If you are a Scottish taxpayer, do not apply these rates to your own numbers. Your property income stays on the Scottish rates unless the Scottish Parliament sets separate ones.

The finance cost restriction and how the reducer is computed are covered in the Section 24 guide. The honest case for and against a company is on incorporating a property portfolio, and landlord tax returns explains how the reducer is reported on the property pages. This is information about how the rules work, not advice about what to do with your portfolio.