Property Income Tax 2027: How Section 24 Magnifies the Hit
From April 2027, rental profits will no longer be taxed at the same rates as salary. The November 2025 Autumn Budget confirmed that property income will get its own income tax rates of 22%, 42% and 47%, two percentage points above the standard rates.
On paper, a two point rise sounds modest. For landlords with a mortgage, it isn't. Because of the way Section 24 already treats mortgage interest, the increase falls on a profit figure that is larger than the cash a landlord actually keeps. This article covers what is changing, how Section 24 works, worked examples of the impact, who is hit hardest and what investors can do before the new rates arrive.
What is changing in April 2027
The new property income rates are:
- Property basic rate: 22% (currently 20%)
- Property higher rate: 42% (currently 40%)
- Property additional rate: 47% (currently 45%)
The rates are set to apply in England and Northern Ireland. The government has said it will work with the Scottish and Welsh governments so they can set their own property income rates under their existing tax powers.
There is also a change to the order in which income is taxed. The personal allowance and other reliefs will be set against employment, pension and trading income first. This means more rental profit is likely to fall into the new, higher property bands.
The rise sits alongside increases to savings and dividend tax rates announced in the same Budget. Landlords who move into a limited company are therefore not fully protected when they take profits out as dividends. Full details are in the Budget 2025 documents and the related HMRC policy papers.
A quick refresher on Section 24
Since April 2020, individual landlords have not been able to deduct mortgage interest as an expense. Instead, they receive a tax credit worth 20% of their finance costs. As announced, this credit will be given at the property basic rate of 22% from 2027. Check the final Finance Bill wording and HMRC guidance for confirmation.
The problem with Section 24 is simple:
- Tax is calculated on profit before mortgage interest, so landlords are taxed on money that goes straight to the lender.
- Higher and additional rate taxpayers only receive relief at the basic rate, so part of their interest cost is never relieved.
- Because interest is added back into taxable income, some basic rate taxpayers are pushed over the higher rate threshold.
Worked examples: why 2% becomes much more
Take one simple buy-to-let property. Rent is £12,000 a year, running costs are £2,000 and mortgage interest is £6,000. The real cash profit before tax is £4,000, but taxable profit under Section 24 is £10,000.
- Higher rate landlord today: 40% of £10,000 is £4,000. Take off a 20% credit on £6,000, which is £1,200. Tax due is £2,800, leaving £1,200. That is an effective rate of 70% on the actual profit.
- Same landlord from April 2027: 42% of £10,000 is £4,200. Take off a 22% credit of £1,320. Tax due is £2,880, leaving £1,120. A two point rise cuts net income by around 6.7%, and the effective rate climbs to 72%.
- Additional rate landlord from April 2027: 47% of £10,000 is £4,700. After the £1,320 credit, tax is £3,380. Only £620 of the £4,000 cash profit is kept, an effective rate of around 85%.
- Basic rate landlord pushed into the higher band: Someone earning £45,000 from employment has about £5,270 of basic rate band left. Their real rental profit of £4,000 would fit inside it. Under Section 24, however, £10,000 is added to their income, so £4,730 is taxed at 42% rather than 22%.
| Scenario | Tax due | Net income | Effective rate on cash profit |
|---|---|---|---|
| Higher rate, current rules | £2,800 | £1,200 | 70% |
| Higher rate, 2027 | £2,880 | £1,120 | 72% |
| Additional rate, current rules | £3,300 | £700 | 82.5% |
| Additional rate, 2027 | £3,380 | £620 | 84.5% |
There is also a sensitivity to watch. If finance cost relief stayed at 20% rather than rising to 22%, the higher rate landlord's tax bill would rise by £200 instead of £80. That would be a 16.7% fall in net income from the same property.
Who is hit hardest
- Highly leveraged landlords, where interest makes up a large share of the rent.
- Investors in low yield, high value areas such as London and parts of the South East, where margins are already thin.
- Higher and additional rate taxpayers holding property in their own names.
- Landlords coming off fixed rate deals around 2027, who may face higher interest costs at the same time as higher tax.
Landlords are already responding. An NRLA survey found that 46% of landlords plan to raise rents over the next 12 months because of the changes, and 33% intend to sell one or more properties. For agents and developers, this points to tighter rental supply and upward pressure on rents in some areas, alongside more ex-rental stock reaching the sales market in others.
What investors can do before April 2027
- Stress test your portfolio. Rerun each property's numbers using 2027 rates and realistic refinancing assumptions. Our buy-to-let cash flow calculator makes this quick to do property by property.
- Review gearing. Paying down debt on the weakest yielding properties can improve after-tax returns, particularly for higher rate taxpayers.
- Rebalance where it makes sense. Higher yielding regions and property types can absorb the change more easily. The UK's highest-yielding buy-to-let areas are a useful starting point.
- Look at ownership structure. Limited companies, joint ownership and income splitting with a spouse may all help. Transfers can trigger stamp duty and capital gains tax, so run the figures through a stamp duty calculator first. We will look at incorporation in more detail in a companion article.
- Take professional advice before restructuring anything.
How PropertyData can help
Use our local market data for prices, rents and yields to find areas where gross yields are strong enough to cushion the tax rise. Check rental comparables from current and historic listings to judge whether a rent increase is realistic locally. When you are weighing up a new purchase, the deal analyser helps you appraise returns on a properly net basis.
Conclusion
For mortgaged landlords, the 2027 rise is not just 2%. Section 24 amplifies it, leaving some investors paying tax equal to 70% to 85% of their real profit. With the new rates less than a year away, now is the time to rerun the numbers, review borrowing and base portfolio decisions on solid local data.
This article is for general information only and is not tax advice. Rates and reliefs are based on Budget 2025 announcements and may change. Check current HMRC guidance and speak to a qualified tax adviser before acting.
