Rents Rise Across the UK, But Are Landlords Actually Better Off?

When rents rise, landlords’ rental profits should rise with them, right? Not necessarily!

Since the Section 24 mortgage interest relief changes took full effect in 2020/21, higher-rate taxpayers are taxed on rental income in a way that leaves them keeping far less of every extra pound of rent than they expect. In some cases, a bigger rent roll simply leads to a bigger tax bill.

If you've recently increased your rent and can't understand why you’re keeping so little of that increase, this article is for you. We explain how Section 24 affects your rental profits, calculate how much of a typical rent rise you actually keep, and look at whether a limited company could offer a more tax-efficient alternative.

Why Do You Keep Less of Your Rent? Section 24!

The reason many landlords keep less of each rent increase is Section 24 of the Finance (No. 2) Act 2015. The legislation replaced full mortgage interest relief for individual landlords with a 20% basic rate tax reduction. As a result, higher-rate taxpayers can find that a rent increase leads to a much larger tax bill while leaving surprisingly little cash in hand.

Before these rules were introduced, landlords deducted mortgage interest from their rental income and paid Income Tax only on their net profit. However, Section 24 phased out this relief between the 2017/18 and 2020/21 tax years. According to HMRC's Property Income Manual (PIM2054), the restriction has applied in full since 2020/21.

Today, an individual landlord pays tax on their rental income before mortgage interest is taken into account. Instead of deducting finance costs as an expense, they receive only a 20% basic rate tax reduction. As set out in the Income Tax (Trading and Other Income) Act 2005, the finance cost restriction is contained in section 272A, while the tax reduction is calculated under section 274A. These rules apply only to individual landlords. Limited companies can still deduct mortgage interest as a normal business expense.

This creates what tax advisers often call “phantom profit.” Although your cash profit may have increased only slightly, your taxable profit appears much higher because mortgage interest is not deductible. As a result, a landlord can be pushed into the 40% Income Tax band, the 60% effective tax rate created by the personal allowance taper between £100,000 and £125,140, or the High Income Child Benefit Charge, which begins once adjusted net income exceeds £60,000. According to the UK Government, these Income Tax thresholds are frozen until April 2031, meaning that even modest rent increases can pull more landlords into higher tax bands through fiscal drag.

When Are Landlord Taxes Rising Further?

Landlord taxes are set to rise from 6 April 2027. From that date, rental profits will be taxed at 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers. These are two percentage points above the standard Income Tax rates. As announced in the Autumn Budget 2025 and enacted by the Finance Act 2026, these higher rates apply only to property income received by individuals.

For landlords who already pay higher rate tax, this means keeping even less of any future rent increase. Someone like Emily, whose rental income already pushes part of her earnings into the 40% tax band, will see the property portion of her income taxed at 42% instead from 6 April 2027. Landlords whose rental profits fall into the additional-rate band will face a 47% tax rate.

The changes apply only to England, Wales and Northern Ireland. Scotland continues to set its own Income Tax rates, so Scottish landlords are not affected by these particular property income rates.

Also, these higher rates do not apply to limited companies. Companies will pay Corporation Tax on rental profits, while retaining full relief for mortgage interest. For many leveraged landlords, the combination of higher property income tax rates and the ongoing Section 24 finance cost restriction further widens the tax gap between owning Buy-to-Let property personally and through a limited company.

Would a Limited Company Let You Keep Your Rental Profits?

Yes, in many cases. For landlords with significant mortgage debt who plan to reinvest their rental profits, owning property through a limited company can be more tax-efficient. This is because companies can deduct mortgage interest in full, pay only Corporation Tax on their profits, and are not affected by either the Section 24 finance cost restriction or the higher property income tax rates due to take effect on 6 April 2027.

For many property investors, these tax advantages are already influencing how they buy rental properties. According to Hamptons' Buy-to-Let Market Update for February 2026, around 75% to 80% of new Buy-to-Let purchases are now made through limited companies. Hamptons also reports that 66,587 new Buy-to-Let companies were incorporated during 2025, the highest annual total on record.

That does not mean every landlord should incorporate. Moving personally owned properties into a company can trigger Stamp Duty Land Tax (SDLT) because the transfer is generally treated as taking place at market value under section 53 of the Finance Act 2003. However, landlords operating through a genuine property partnership may qualify for incorporation relief under Schedule 15 of the Finance Act 2003, reducing or eliminating the SDLT charge.

There can also be Capital Gains Tax (CGT) implications. Unless incorporation relief is available under section 162 of the Taxation of Chargeable Gains Act 1992, transferring a property into your company may crystallise a taxable capital gain. From 6 April 2026, landlords must actively claim this relief rather than relying on it automatically.

Whether incorporation relief applies depends on whether your property activities amount to a genuine property business rather than passive investment. In Ramsay v HMRC [2013] UKUT 226 (TCC), the Upper Tribunal confirmed that property letting can qualify as a business for the purposes of section 162. According to HMRC's Capital Gains Manual CG65715, one indicator is whether the landlord spends around 20 hours a week actively managing the business, although no single factor is determinative.

Even then, incorporation is not the right answer for everyone. Basic rate taxpayers already receive mortgage interest relief at their marginal tax rate, so the benefit of avoiding Section 24 is often much smaller. Landlords who need to withdraw most of their company's profits must also consider Dividend Tax, while mortgage products for limited companies often carry higher interest rates and fees. Ultimately, whether a limited company leaves you better off depends on your income, borrowing, long-term investment plans and how much profit you intend to leave in the business.

Conclusion

Rents rise, but what a landlord keeps depends on tax band, borrowing and structure far more than on the actual rent. If your rental income is climbing and you pay tax at 40% or more, or a rent rise is about to tip you over £50,270, the increase may be doing more for HMRC than for you.

This is not a question a rental yield calculator can answer. Deciding whether to hold personally, transfer a share to a spouse, or incorporate is fact-specific, and the cost of getting it wrong runs into thousands. If a rent rise has changed your position, it is worth checking before your next tax return.