Moving Up a Gear

Single property landlords will be pushed into higher rate tax bracket

The restriction on the deduction of finance costs from 6th April 2017 has meant that single property landlords could easily find themselves becoming higher rate taxpayers because of the new rules. This is illustrated by the example of Imogen below.

Example: Imogen

Imogen is self-employed and works from home. Her annual business profits are £30,000. She also receives an annual rental income of £35,000 from the letting of a residential property which was purchased by way of a substantial mortgage which incurs annual interest of £37,000.

Imogen doesn’t believe that she will be affected by the changes to the deductibility of finance costs because she only pays tax at 20% but looking forward to 2020/21 it will be seen that she is mistaken:


                                                                                       2016/17                                       2020/21

                                                                                             £                                                    £


Business profit                                                               30,000                                          30,000

Rental income                                                               35,000                                          35,000             


Less:  loan interest                                                      (35,000)                                                     

Total income                                                                 30,000                                          65,000

Less:  personal allowance                                         (11,000)                                        (11,000)

Taxable income                                                            19,000                                          54,000


Tax due:

£19,000/£32,000 @ 20% =                                         3,800                                             6,400

£22,000 @ 40% =                                                                                                                8,800


Less:  interest relief (£35,000 x 20%)                                                                             (7,000)         


Net tax payable                                                           3,800                                             8,200       

According to recent research carried out by the National Landlords Association (NLA), this realisation is dawning on more single property landlords. Some 16% now believe that the changes will propel them into the higher rate tax bracket, representing an increase in opinion from 2016.

The current average annual mortgage finance costs for a single property landlord is £5,600, meaning that those earning just below £45,000 could be paying tax at 40%.

Individuals who only let the solitary property are the most common type of landlord, representing 62% of the UK’s landlord population, ie approximately 1.5 of the estimated 2.3 million. The tax changes are therefore thought to affect approximately 368,000, with young couples and families potentially at the greatest risk if landlords are forced to sell their properties as a result.

The NLA suggest that any single property landlord affected by the 40% rate would need to increase rents by 11% in order to continue to make a steady return from the property, equating to as much as £116 per calendar month for the average rental property.

Richard Lambert, Chief Executive Officer at the NLA, said:

“Single property landlords are responsible for providing a huge proportion of the UK’s private rented homes, and these figures show that, slowly, more and more are waking up to the fact that their tax bills could be significantly higher in the coming years.

A fifth (21%) of landlords with just one property, do not make a profit, and over the next few years those bumped up a tax bracket will find that their ability to continue to provide good quality housing will seriously be affected.

More and more families and young couples are making their home in the private rented sector because they cannot either access social housing or afford to buy their own home. Affected landlords will have the choice of either increasing rents or selling up – so either way it’s the people they currently home who look likely to suffer the most as a result of this damaging tax charge.”

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