Landlords will be alarmed by reports the Government is considering unleashing yet another tax raid upon them by imposing National Insurance on rental income.

Treasury officials are said to be looking at charging National Insurance on property earnings as they scramble to plug a £50billion fiscal black hole.

Higher taxes and increased regulation have pounded landlords since 2016 and this is a trend that shows no signs of abating. 

As recently as October, Rachel Reeves added a 2 per cent stamp duty surcharge on top of the extra 3 per cent landlords already pay, adding thousands of pounds to the cost of buy-to-let and second home purchases.

We explain what taxes landlords currently pay, and what they could face under the new proposals. 

What is National Insurance and who pays? 

National Insurance is currently mandatory for salaried employees earning more than £12,570 a year, or for self-employed people making a profit of more than £12,570 a year.

It is paid from the age of 16 to state pension age. It’s payable on income over £242 a week or self-employed profits of more than £12,570 a year.

Most salaried employees pay 8 per cent on their annual earnings between £12,570 and £50,271 and 2 per cent on anything over that.

Self-employed people pay 6 per cent on profits over £12,570 and 2 per cent on profits over £50,270.

This could mean that a basic rate tax-paying landlord with a £30,000 salary, earning £20,000 in rental profit a year could see their annual tax bill on the rental income rise from £4,000 to £5,600.

What tax do landlords pay now?

Landlords who own buy-to-lets in their own names, rather than through a limited company currently pay income tax on their rental income.

What a landlord receives in rent is added to whatever other income they earn to establish what rate of tax they pay.

A landlord with annual income between £12,571 and £50,270, including their earnings from rent and their salary, therefore pays 20 per cent tax. 

Above that, they pay 40 per cent tax on the portion of their earnings between £50,271 and £125,271 and 45 per cent tax on anything above that. 

This means a basic rate taxpayer earning £10,000 of rental profit pays £2,000 in income tax on the rental profit, while a higher rate taxpaying landlord earning £10,000 of rental profit pays £4,000 in income tax on the rental profit. 

It remains to be seen whether landlords would be able to offset their mortgage costs against the National Insurance payments.

Before 2017, landlords could deduct the full amount of mortgage interest from their rental income before calculating tax.

Now landlords only receive tax relief based on 20 per cent of their mortgage interest payments.

This is less generous for higher rate taxpayers, who previously received a 40 per cent tax relief on mortgage costs.

A higher-rate taxpayer landlord with mortgage interest payments of £500 a month on a property rented out for £1,000 a month now pays tax on the full £1,000, with a 20 per cent rate on the £500 that is being used towards the mortgage.

David Fell, lead analyst at property firm, Hamptons, thinks it's likely - though not confirmed - that National Insurance would be levied on pre-mortgage profits. 

'Those with a mortgage then get a credit equivalent to 20 per cent of the mortgage interest paid, which, for lower-rate taxpayers, essentially means the mortgage is deductible against income tax. 

'While for higher-rate taxpayers, only around half of it is. So unless the Government introduce an 8 per cent national insurance "credit", it's going to be really quite painful for mortgaged landlords who are lower rate taxpayers in particular.'

What is being proposed by Rachel Reeves? 

Applying National Insurance in its current form to rental income will hurt basic rate taxpayers much more than it will hurt higher rate taxpayers.

Under these proposals a basic rate tax paying landlord earning £10,000 of rental profit will see their annual tax bill rise from £2,000 to £2,800, if they have to pay National Insurance at the same rate as salaried employees on top of their current taxes. 

Meanwhile, a higher rate tax paying landlord earning £10,000 of rental profit will see their annual tax bill rise from £4,000 to £4,200.

'Unlike the impact of previous tax reforms, which hit higher-rate taxpayers hardest, levying National Insurance on rental income would primarily hit lower-rate taxpayers and younger landlords,' adds David Fell of Hamptons. 

'The average lower-rate taxpaying landlord could see their tax bill more than double from around £700 a year to just over £1,600. 

'Meanwhile, the ageing landlord profile means a third will be exempt from paying any national insurance by virtue of being retired, often those with the largest portfolios.'

How much could it raise for the Government?

Treasury officials are said to think the proposals could levy £2billion a year from property earnings, according to the Times.

This is based on the fact there was £27billion received by the Treasury from property income in the 2022-23 tax year.

Given that the Government black hole is reportedly £50billion, a £2billion windfall would cover 4 per cent of that hole if their calculations are correct.

What could it mean for landlords?

The National Insurance raid would apply further pressure to landlord budgets across the country.

Landlords with mortgages currently face far higher costs today than they did prior to interest rates surging in 2022.

The average five-year fixed rate buy to let mortgage is around 5.25 per cent, according to Moneyfacts. That compares to roughly 3 per cent at the start of 2022.

It means a typical landlord requiring a £200,000 interest-only mortgage on a five-year fix will typically pay £875 a month in mortgage costs if buying or remortgaging at the moment, excluding fees. That compares to just £500 a month little more than three and half years ago.

On top of higher mortgage costs, landlords have to factor in the cost of periods where the property is empty, repairs, maintenance, letting agent fees, compliance checks, insurance and service charges.

Partly as a result of these increased costs being felt across the sector, buy-to-let mortgage repossessions are up by 11 per cent year-on-year, according to the latest data from UK Finance.

What are people saying

Many across the property industry think a National Insurance raid on landlords would be bad for renters.

Fell adds: 'Adding National Insurance to landlords' tax bills would represent the latest measure in a long line of tax hikes over the last decade.

'Rents have outpaced inflation, and making it even more expensive to be a landlord is likely to mean tenants paying higher rents. 

'While higher rents hit tenants' pockets, they also carry a direct cost to the Government, who pay many private landlords through housing benefit.'

Howard Levy, director of mortgage broker SPF Private Clients also thinks it could result in many smaller landlords selling up.

'The issue with targeting the private rented sector is that landlords' net yields have already been stretched over the past few years due to taxation changes, higher costs, licencing changes and higher interest rates,' says Levy.

'Depending on how high the level of National Insurance the Chancellor looks to introduce, we could see many smaller landlords leaving the market.

'The upshot of this would then be less stock available to rent which in turn would also increase rents, assuming demand remains the same.'

What can landlords do to avoid the tax? 

Landlords have the option to transfer the ownership of their properties to limited companies, rather than in their own names. This means they pay business taxes instead of personal ones. 

It is not clear whether properties owned via businesses would be subject to Reeves' proposed rules.  

The number of companies holding buy-to-let property in the UK passed 400,000 at the start of this year, according to analysis of Companies House data by Hamptons.

A record breaking 61,517 new buy-to-let limited companies were set up in 2024, a 23 per cent increase on what had previously been a record set in 2023.

Holding property in a limited company, also known as 'incorporating', is an alternative to holding property in one's personal name, and the tax structure is different. 

Owning within a limited company comes with various tax advantages, including the fact that corporation tax - payable in a company structure - is lower than income tax, which is payable for landlords who own properties in their own name.

This allows landlords to build up profit within the company, which they can use it to re-invest towards another property sooner than they might otherwise have done if owning in their own name.

Owning in a limited company also allows property investors to fully offset all of their mortgage interest against their rental income, before paying tax.

However, Howard Levy of SPF Private Clients warns that it's possible the the Government could apply the same rules to limited company landlords as well.

'While it is difficult to comment until we see the finer detail, there is no information about whether this would be for properties owned in a landlord's own name or if it would include limited company buy-to-lets.

'Landlords need to ensure that their business remains profitable, so any National Insurance payment would need to be factored into the rents they are charging – so would in effect end up being paid by tenants.