Rental Income Tax Rates Set to Rise: Is Investing Through a Limited Company Still Viable for Landlords?
- TBA
- 5 days ago
- 4 min read
For many years, buy-to-let property has been viewed as a reliable way to secure steady income and achieve long-term wealth growth.
However, the landscape has since shifted. While rents across the country continue to rise, changing tax policies and increasing costs have made it harder for landlords to translate high turnover into high profit. Furthermore, the end of fixed-term tenancies and the abolition of 'no-fault evictions' have added layers of complexity to the sector.
For both resident and overseas landlords, the most critical variables currently at play are the shifting tax and regulatory environments.
Rising Rents – Not Always Rising Returns
On the surface, rental income appears robust. In December 2025, the average monthly rent reached £1,368, a 4% increase year-on-year.
However, this growth varies significantly by region. For instance, in the year to December 2025, rents in the North East rose by 7.9%, while London saw a more modest increase of 2.1%.
Property prices are equally bifurcated. Generally, areas with the highest rents also command the highest purchase prices, which often results in lower rental yields (the ratio of annual rent to property value). Consequently, high rental income does not automatically guarantee a superior return on investment.
A Complex Regulatory and Tax Landscape
Landlords are facing pressure from two sides.
Firstly, the Renters' Rights Act, which came into force last month, has strengthened tenant security. While designed to protect renters, it has caused some anxiety among landlords, leading to concerns about more stringent vetting processes. Secondly, the implementation of Making Tax Digital (MTD) for Income Tax and a series of rate changes are significantly impacting tax liabilities.
Mortgage Interest Tax Relief
Since April 2020, landlords have been unable to deduct mortgage expenses from their rental income to reduce their tax bill. Instead, the system provides a tax credit equivalent to 20% of mortgage interest payments. This means that while you can no longer reduce your taxable income directly, you can lower your final tax liability through this credit.
For example, if a landlord receives £950 in monthly rent (£11,400 annually) and pays £600 in monthly mortgage interest (£7,200 annually), they are taxed on the full £11,400. Under current rules, they receive a tax credit of £1,440 (20% of £7,200). Ultimately, a basic-rate taxpayer would pay £840 in tax, while a higher-rate taxpayer would face a bill of £3,120.
This policy was phased in between 2017 and 2020 and has been particularly disadvantageous for higher-rate taxpayers, who previously benefitted from up to 40% relief.
New Adjustments from April 2027
From 6 April 2027, the government is set to increase tax rates on property income. The basic rate will rise to 22%, the higher rate to 42%, and the additional rate to 47%. To align with the new basic rate, the mortgage interest tax credit will also increase to 22%.
This adjustment means the tax structure is evolving again, forcing landlords to re-evaluate their returns. This has prompted many to consider either selling their portfolios or transferring their assets into a limited company structure to optimise their tax position.
Is holding property through a limited company more beneficial?
The way a property is held (either personally or through a company) directly impacts tax efficiency.
In theory, if a landlord operates through a limited company, they can deduct mortgage interest as a business expense before calculating profit, effectively retaining the advantages of the old system.
If held personally, rental profits are treated as personal income and taxed at 20%, 40%, or 45% (rising to 22%, 42%, and 47% in 2027). In contrast, landlords using a limited company pay Corporation Tax, currently ranging from 19% to 25%. This advantage has led to a surge in 'incorporation'; by 2025, there were over 440,000 buy-to-let companies in operation, a nearly fivefold increase since 2016.
However, a company structure is not a universal fix and may not suit everyone.
Firstly, commercial lending rates for companies are often higher than personal mortgage rates, which can offset tax savings. Secondly, transferring personally owned property into a company triggers Stamp Duty Land Tax (SDLT), which is a significant upfront cost.
Furthermore, running a company adds administrative complexity. Landlords must file company accounts and pay Corporation Tax.
If you wish to use the rental profit for personal spending, you must extract it as dividends. While dividend tax rates are generally lower than income tax, they have also risen: as of 2026, the ordinary rate is 10.75% and the upper rate is 35.75%.
Additionally, the freezing of Income Tax thresholds until 2031 may push more landlords into higher tax brackets.
Rising costs of buying and selling
Beyond ongoing taxes, transaction costs are climbing. Since October 2024, the Stamp Duty surcharge on additional properties increased from 3% to 5%, raising the barrier to entry. When selling, landlords must also account for Capital Gains Tax (CGT):
Basic-rate taxpayers: 18%
Higher/Additional-rate taxpayers: 24%
The annual exempt amount remains low at £3,000 (£1,500 for trusts). Market volatility can also impact the timing of a sale, potentially restricting liquidity.
Consequently, the decision to invest in or retain a buy-to-let property is no longer a simple one. Investors must carefully weigh their tax status, financing options, and risk appetite.
The View from TB Accountants
The shift in mortgage interest tax policy has fundamentally altered the financial landscape for landlords, particularly those in higher tax brackets.
Under the new regime, deciding whether to incorporate, how to structure financing, and how to balance tax vs. operational costs are paramount.
Before making any significant changes, it is essential to conduct a full financial assessment and seek professional advice to ensure your investment remains viable in this changing environment.
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