Taxing Questions: Rental Income

This article was originally published on 25th October in Taxing Questions: How Labour can raise the revenue we need edited by Joe Dromey and Iggy Wood for Fabian Society.

Rental Income

As Jeremy Hunt said in 2024, there is an unfair double tax on work. Take-home pay is reduced not just by income tax, but by national insurance too – the latter on both the employee and employer side. Landlords, however, only pay income tax on their rental income. That tax difference is unfair and unjustified. Landlords should not face lower marginal tax rates than their tenants.

The previous government made some progress in narrowing this gap by cutting national insurance, but this was extremely expensive. Instead, there’s a case for a ‘levelling-up’ of tax treatment, particularly in the context of the government’s need to raise more revenue.[1] In other words, tax rates on rental income should be increased to get closer to those faced by employment income.

Leaving aside the impact of employer national insurance, but adding together income tax and employee national insurance, the direct tax rates faced by working-age employees outside of Scotland are a basic rate of 28 per cent, a higher rate of 42 per cent and a top rate of 47 per cent. In contrast, rental income only attracts income tax at 20, 40 and 45 per cent.

A more even-handed approach could take one of several forms. A new class of national insurance could be charged on unincorporated rental income (including beyond pension age). An income tax surcharge could be added to achieve the same goal. Or – more radically – the whole tax system could shift further away from employee NI and towards higher income tax rates.[2] The end goal should be that rental income faces the same top rate of 47 per cent, higher rate of 42 per cent and basic rate of 28 per cent as income from work (though the 8 point jump in the lower rate, from 20 to 28 per cent, could warrant a phasing-in at least). This could raise around £1-2bn: not fiscally transformative, but an important contribution, and a fair one given the current gap in tax rates, landlords’ higher wealth levels, and the 2024 autumn budget’s tax rise on wages. With an average rent of around £1,400 per month,[3] and assuming taxable profits are only half of gross rent,[4] a 2-percentage point tax rise would cost a landlord of one property £170 a year, for example.

What would be the dynamic effects of such a change? Firstly, in isolation, the incentive for rental income to be taken via a company would increase. A good accompaniment, therefore, would be to raise the 8.75 per cent basic rate of dividend tax, which is also low compared to taxes on other income.[5] But, in general, taxes on dividends are already higher than those on rental income, given the combination of both corporation tax and dividend tax – with a resulting top tax rate of over 54 per cent. (Taxes on unincorporated rental income, then, are not just low compared to taxes on wages, but compared to those on business investment too.)

Second, while a tax rise on landlords’ profits would, by definition, have little impact on whether landlords make a nominal profit, post-tax returns would drop slightly, and some landlords would decide to sell up. However, a shift away from real estate demand (and towards higher investment in shares and bonds) is not necessarily a bad thing. When landlords sell up, the homes are not destroyed: the only meaningful shift would be between the private rented sector and the owner-occupied sector, with a slight rise in home ownership rates. House prices would be slightly lower than otherwise given the reduced demand from private landlords. It is possible that rents could be pushed up very slightly. However, concerns over the living standards of tenants would be far better addressed by unfreezing local housing allowances or by building more homes, for example, than by choosing lower tax rates for landlords in the hope that these will be passed on.

This proposal is not about bashing landlords, but about moving towards more equal taxation of different sources of income. It could make the tax system both fairer to workers and more efficient, while helping to put the nation’s finances on a sounder footing.

[1] For more on the deterioration in the public finances, see: A Corlett, Call of duties: Revenue and reform for Autumn Budget 2025, Resolution Foundation, September 2025.

[2] A Corlett, Call of duties: Revenue and reform for Autumn Budget 2025, Resolution Foundation, September 2025.

[3] ONS, Private rent and house prices, UK, September 2025.

[4] In aggregate, expenses equal around half of gross rental income. HMRC, Property rental income statistics: 2025, August 2025.

[5] A Corlett, Call of duties: Revenue and reform for Autumn Budget 2025, Resolution Foundation, September 2025.