The Impact Of The Autumn 2025 Budget On Rental Income

Yesterday, the government announced adjustments to the tax rates for property, savings, and dividends to ensure, in its view, a fairer approach to taxing asset-driven income. 

At present, individuals who receive income from these ‘passive' sources pay less tax than those earning wages or working for themselves, as they do not contribute to National Insurance. 

To address this gap, taxes on property, savings, and dividends will be increased so that they more closely match the overall tax rates applied to employment earnings.

Currently, savings and dividend income are taxed at specific rates and are treated as the highest portion of an individual's total income, which can result in higher Income Tax rates. Other types of income such as from employment, pensions, trading, or property are classified together as ‘non-savings, non-dividend' income and are taxed before savings and dividends.

With the new rules, property income will have its own set of tax rates. Property income will be taxed after employment, trading, and other income, but before savings and dividends. For income tax calculations, the order will now be:

• Non-property, non-savings, non-dividend income
• Property income
• Savings income
• Dividend income

The new property income tax rates from April 2027 are:

• Basic rate: 22%
• Higher rate: 42%
• Additional rate: 47%

At present, individuals with residential finance costs cannot deduct these costs from their property business profits; instead, they receive basic rate tax relief through a reduction during Step 6 of the Income Tax calculation process (as outlined in Section 23 of the Income Tax Act 2007). 

Going forward, taxpayers will continue to receive this relief, but from 2027 to 2028 it will be provided at the property basic rate.

It is possible that some landlords will consider leaving the market in response to the new tax regime. The increased tax rates and the continued restriction of finance cost relief, especially for those in higher tax bands, could make property investment less attractive and erode profits. Faced with the prospect of rising tax liabilities and reduced relief, some landlords may decide to sell their properties, downsize their portfolios, or exit the sector altogether. Others may attempt to offset these changes by increasing rents or restructuring their holdings, but for those unable or unwilling to adapt, departing the market may seem like the most prudent option. If you are considering whether remaining in property investment is right for you or considering incorporating your property investment portfolio, professional advice is crucial, so please reach out if we can assist with a review.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.