If you own rental property, April 2027 brings significant changes that will affect how much tax you pay on your rental income.
The announced changes represent a meaningful shift in the tax burden on landlords.
In this article, we explain what is changing, what it means in practice, and what steps you can take to protect your position.
What is changing?
From 6 April 2027, rental income will be subject to a new, dedicated set of income tax rates that are higher than the current standard rates. The new property income tax bands will be:
| Tax Band | Current Rate | Rate from April 2027 |
| Basic rate | 20% | 22% |
| Higher rate | 40% | 42% |
| Additional rate | 45% | 47% |
This is a 2% increase across every band; a 10% relative rise in the basic rate alone. These rates apply to landlords in England, Wales, and Northern Ireland. Scotland has the ability to set its own rates separately.
Changes to the personal allowance
From April 2027, there will also be a new restriction on how landlords can allocate their Personal Allowance. Currently, taxpayers have flexibility in deciding how their Personal Allowance is applied across different income sources. Under the new rules, the Personal Allowance must first be set against employment, trading, or pension income before it can be applied to rental income.
In practice, this means that a landlord with, say, £20,000 of employment income and £10,000 of rental income will have their entire Personal Allowance absorbed by the employment income, leaving the full £10,000 of rental profit taxable at the new 22% basic rate. For many landlords, this will result in a higher tax bill even before the rate increase is factored in.
Finance cost relief
The restriction on mortgage interest relief, introduced in stages between 2017 and 2020, remains in place. Individual landlords cannot deduct mortgage interest or other finance costs when calculating their taxable rental profit. Instead, they receive a tax credit equivalent to the basic rate of tax which, from April 2027, will itself rise from 20% to 22%.
This means landlords who are higher or additional rate taxpayers will continue to pay income tax on profits they do not actually receive in cash. For those with high levels of borrowing, this distortion becomes particularly acute.
What does this mean for landlords?
These changes compound a series of restrictions that have accumulated over recent years from the phased removal of mortgage interest relief to the abolition of the furnished holiday let regime in April 2025, to reduced Capital Gains Tax (CGT) annual exemptions.
Taken together, landlords are now operating in a different tax environment to the one that existed even five years ago. The impact of the 2027 changes will be felt differently depending on individual circumstances:
- Higher and additional rate taxpayers will see a direct cash cost from the rate increases. Those with mortgaged properties will be particularly affected, as the mismatch between taxable profit and actual cash received is already significant.
- Basic rate taxpayers may not feel the immediate pinch as acutely, but the restriction on Personal Allowance allocation could draw more rental income into tax than before, especially where other income sources already use up the allowance.
- Those with low-yield properties may find that, after accounting for the higher tax charge, maintenance costs, and any mortgage repayments, the return does not justify holding the asset.
- Tenants may also feel the effects indirectly, as landlords facing a higher tax burden may seek to increase rents to maintain returns, or choose to exit the market altogether thus reducing the supply of rental properties at a time of ongoing housing pressure.
Steps that landlords can take
With some forward planning, there are steps landlords can take to manage the impact of these changes before April 2027 arrives.
- Recalculate the numbers: Landlords could model rental profits under the new rates; factoring in the change to Personal Allowance allocation, the higher tax bands, and the finance cost restriction. From this, they would be able to identify where they stand, and id any properties may become unviable.
- Consider their ownership structure: Some landlords are exploring whether transferring properties into a limited company makes financial sense. Companies continue to benefit from full deductibility of finance costs when calculating taxable profits, unlike individual landlords. Corporation tax (currently 25% for most property companies) may also be lower than the marginal income tax rates an individual landlord would face under the new bands.
A corporate structure could also offer greater flexibility over the timing and method of profit extraction, whether through salary, dividends, or loan repayments which can be used to manage the overall tax position effectively. However, it is important to understand that incorporation is not without cost or complexity. Transferring a property into a company is treated as a disposal for CGT purposes, and Stamp Duty Land Tax (SDLT) will also apply. There are reliefs available in some circumstances, but the eligibility criteria are strict and must not be assumed. Incorporation may make most sense for larger, highly mortgaged portfolios where the landlord intends to reinvest profits rather than extract them immediately. Professional advice is essential before taking this route.
- Review rental pricing: For those who intend to remain in the market as individual landlords, it may be worth reviewing whether current rental levels are sufficient to absorb the higher tax charge, or whether adjustments are needed to maintain a viable return. Any increase should, of course, be considered in the context of the local market and existing tenancy agreements.
- Assess whether to hold, refinance, or sell: For some landlords, particularly those with high leverage or low yields, selling part or all of their portfolio may be the most rational decision. Those considering selling should bear in mind that CGT of up to 24% may be payable on the gain, and must be reported and paid within 60 days of completion. Equally, if a mortgage arrangement is coming up for renewal, landlords may want to explore whether refinancing at a more competitive rate could improve their cash flow position ahead of 2027.
- Seek professional tax advice: The interaction between the new property income tax rates, the Personal Allowance restriction, the finance cost rules, and broader personal tax considerations means that every landlord’s situation is different. Taking advice from a qualified tax adviser will help landlords to understand their specific position, explore the options available, and put a plan in place before the changes take effect.
If you would like to discuss how the 2027 tax changes may affect your rental income and what options are available to you, please get in touch with our tax team. We work with landlords at every stage of their property journey and would be glad to help you plan ahead with confidence. Call us on 01905 777600 or email hello@ormerodrutter.co.uk for more information.
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