Income tax to become even more convoluted!

At the November 2025 Budget, the Chancellor announced increases in the tax rates applicable to income from property businesses and savings, to apply from 6 April 2027. The basic, higher and additional rates on rental and savings income will all rise by two percentage points in 2027/28, to 22%, 42% and 47% respectively. These increases are being legislated in Finance (No.2) Bill 2026.

Where residential property is being let, finance costs (e.g. mortgage payments) are not treated as a deductible expense when calculating the taxable profits. However, a basic rate ‘tax reducer’ is given on the disallowed finance costs. This tax reducer will increase to 22% in April 2027.

There will also be new rules about the order in which certain amounts are deducted from income. Reliefs and allowances (such as trading business losses or the personal allowance) will be deductible against other sources of income in priority to property, savings and dividend income. Property income will be treated as the top slice of non-savings, non-dividend income, coming before savings income (if there is any) and then dividend income.

Scottish and Welsh taxpayers
While savings and dividend tax rates apply across the whole of the UK, the Scottish Government and Welsh Assembly can vary the rates of tax on non-savings, non-dividend income (although this has not yet happened in Wales). It remains to be seen if either legislative body will opt not to increase their property income tax rate in line with the rest of the UK from 6 April 2027, as they are to be given new powers to vary the property tax rates.

Example
Nicola has a salary of £38,000, dividends of £15,000 and residential property business profits of £36,000 (before mortgage interest of £14,300). She is an English taxpayer. The tax-free personal allowance is £12,570 and the basic rate band is £37,700. Her tax calculation in 2027/28 will be as follows.

If you have a rental business, consider whether, once property income tax rates rise in April 2027, your letting business will still be worth operating, particularly if it was previously a furnished holiday let and so has also been hit by the disallowance of finance costs in April 2025. We will be happy to discuss these changes with you if you have any concerns, please do get in touch.