Landlord Tax Rise Sparks Fears of “Disastrous” Impact on the Private Rented Sector

Summary: Chancellor Rachel Reeves has announced a 2% increase in tax rates on property income, effective from April 2027, raising concerns among landlords about the potential negative effects on the private rented sector (PRS). Industry experts warn this could reduce rental property supply and increase rents, further squeezing landlords’ profits.

Tax Increase on Property Income

In the Budget delivered on 26 November 2025, Chancellor Rachel Reeves confirmed a 2% rise in the tax rates applied to property income. From April 2027, the basic rate on property income will increase to 22%, the higher rate to 42%, and the additional rate to 47%. This change affects landlords’ rental income, as well as savings and dividend income.

Reeves justified the increase by highlighting perceived inequalities in the tax system. She stated in Parliament: “A landlord with an income of £25,000 will pay nearly £1,200 less in tax than their tenant with the same salary because no National Insurance is charged on property, dividend or savings income. It’s not fair that the tax system treats different types of income so differently.”

Warnings from the Office for Budget Responsibility

The Office for Budget Responsibility (OBR) issued a leaked report prior to the Budget announcement, cautioning that this tax rise, combined with previous measures over the last decade, will further reduce returns for private landlords. The OBR warned that this erosion of landlord returns is likely to diminish the supply of rental properties in the long term, potentially leading to sustained rent increases if demand continues to outpace supply.

Industry Concerns Over Rental Market Impact

Adam Jennings, Head of Lettings at Chestertons, expressed concern that the tax hike could prompt more landlords to sell their properties, shrinking the rental market and making it harder for tenants to find affordable homes. “More landlords could decide to sell up which will result in fewer available rental properties and leave more renters struggling to find a property within their budget,” he said.

Jason Tebb, President of OnTheMarket, echoed these worries, describing the tax increase as “disastrous” for landlords. He noted that landlords have already faced significant financial pressures from mortgage interest relief cuts, the removal of the wear-and-tear allowance, stamp duty surcharges, fiscal drag, and increasing regulation. “This reform will simply see more and more landlords removing themselves from the PRS sector for a further squeeze on rental supply,” Tebb added.

Ben Beadle, Chief Executive of the National Residential Landlords Association (NRLA), highlighted the broader housing shortage, stating that nearly one million new rental homes are needed by 2031. He criticised the Budget for imposing higher costs on tenants without addressing the underlying supply issues. “This Budget will clobber tenants with higher costs while doing nothing to improve access to the homes people need,” Beadle said.

New High-Value Council Tax Surcharge

Alongside the tax rise, the Chancellor introduced a High-Value Council Tax Surcharge in England, targeting properties valued over £2 million. From 2028, owners of such properties will face an annual charge of £2,500, increasing to £7,500 for homes worth more than £5 million. Reeves pointed out the disparity in council tax contributions, noting that a band D home in Darlington or Blackpool pays just under £2,400 annually, which is nearly £300 more than a £10 million mansion in Mayfair.

Matthew Thompson, Head of Sales at Chestertons, warned that this surcharge might encourage some homeowners to sell before the levy takes effect, while potential buyers may hesitate to purchase properties subject to the new charge. He suggested this could lead to more high-value homes remaining empty or sellers lowering their asking prices significantly.

Omissions and Industry Reactions

Despite the tax increases, the Chancellor did not extend National Insurance contributions to rental income, nor did she address other landlord concerns such as freezing Local Housing Allowance (LHA), the cost of greening homes, or reforming Capital Gains Tax. These omissions have been noted by the NRLA and other industry bodies.

Isobel Thomson, Chief Executive of safeagent, the UK’s largest not-for-profit accreditation scheme for lettings and management agents, criticised the Government for the contradictory approach. She said: “It is difficult to equate this with the announcement in the Budget of an increase in tax rates on property income and the clear-sighted observation of the OBR that the measure will have a knock-on effect on the supply of property to rent with the potential to drive landlords out of the market and increase rent. It is a shame that common sense has not been applied.”

Implications for Landlords and the PRS

The tax rise represents a significant financial challenge for landlords, many of whom are already managing tight margins due to previous tax and regulatory changes. The potential reduction in rental property supply could exacerbate the ongoing housing crisis, leading to higher rents and fewer affordable options for tenants.

Landlords should carefully review their portfolios and financial plans in light of these changes, considering the long-term impacts on profitability and sustainability. Staying informed about further legislative developments and seeking professional advice will be crucial to navigating this evolving landscape.

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Chancellor Rachel Reeves has increased tax rates on property income by 2%, raising concerns about the impact on landlords and the private rented sector. Experts warn this could reduce rental supply and increase rents from 2027.

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Landlord Tax Rise in 2027 Budget Sparks Concerns Over Rental Market Impact