Rent Rise Fails to Offset Landlord Tax

The Housing Minister has told MPs that the latest increase in tax on rental income is unlikely to have a significant effect on rents. However, the Office for Budget Responsibility (OBR) has warned that the changes could reduce the supply of rental properties and contribute to higher rents over the longer term.

The disagreement comes as landlords prepare for a four-percentage-point increase in property income tax from 6 April 2027. The changes will affect individual landlords and partnerships in England, Wales and Northern Ireland, adding further pressure to an already challenging rental market.

During questions in the House of Commons on Monday 2 November 2026, Housing Minister Matthew Pennycook referred to the OBR’s assessment of an earlier tax increase. He said the organisation had estimated that a two-percentage-point rise would increase rents by just 0.2%, and suggested the additional two-point increase announced in the 28 October Budget would have a similarly limited effect.

However, the OBR’s latest report paints a more concerning picture for the private rented sector. It warns that reducing landlords’ returns could discourage investment in rental properties, potentially leading to fewer available homes and higher rents over time.

Key facts landlords need to know

• From 6 April 2027, property income tax rates in England, Wales and Northern Ireland will increase to 24%, 44% and 49%, compared with the current rates of 20%, 40% and 45%.
• The Section 24 mortgage interest tax credit will also increase from 20% to 24%, remaining aligned with the basic property income tax rate.
• Matthew Pennycook told MPs that the OBR estimated the rental impact of the previous two-percentage-point increase at 0.2%. However, this figure could not be found in the published November 2025 OBR report.
• The OBR’s October 2026 report warns that the combined tax increases represent a material reduction in landlord returns and could contribute to steadily rising rents.
• UK average private rents reached £1,406 per month in September 2026, representing annual growth of 3.8%, according to the ONS.
• For an individual landlord, the additional tax is broadly equivalent to 4% of rental profit after mortgage interest, although the amount of additional rent needed to cover it will depend on their tax band.

What was said in Parliament?

The issue was raised by Labour MP Paula Barker, who questioned whether the latest Budget measures could result in higher rents for tenants.

In response, Matthew Pennycook referred to the OBR’s assessment of the previous tax increase, saying that its estimated effect on rental prices was only 0.2%. He added that the Government expected the additional two-percentage-point increase announced in the latest Budget to have a similarly small impact.

Conservative MP Steve Barclay challenged this position by referring to page 77 of the OBR’s latest report. He highlighted its warning that the four-percentage-point increase could result in fewer rental properties becoming available and higher rents as landlords respond to the additional costs.

He asked whether the Housing Minister believed the OBR’s assessment was incorrect.

Mr Pennycook stood by his earlier comments and argued that increasing the supply of housing was the best way to address affordability problems in the private rented sector. He also reiterated that the Government did not support rent controls.

The full exchange was recorded in Hansard on 2 November 2026.

What does the OBR’s report actually say?

The difference between the minister’s comments and the OBR’s assessment becomes clearer when looking at its reports from November 2025 and October 2026.

November 2025: The first two-percentage-point increase

In its November 2025 Economic and Fiscal Outlook, the OBR acknowledged that the earlier tax increase could have a negative effect on rental prices as landlords passed on some of the additional costs.

The report also suggested that the change could reduce annual house price growth by approximately 0.1 percentage points from 2028.

More importantly, the OBR warned that the gradual reduction in landlord returns could discourage investment in rental properties over the longer term. If the number of available rental homes continued to fall while demand remained higher, this could result in rents increasing steadily.

The report did not contain the specific 0.2% rental impact figure quoted by the Housing Minister. It is possible that this came from supporting analysis that was not included in the published document. For now, the figure should be understood as the Government’s interpretation of the OBR’s findings rather than a published estimate that can be independently verified from the report.

October 2026: The additional tax increase

The OBR’s October 2026 report takes the concerns further.

In paragraph 3.46 on page 77, it describes the combined tax increases as a material reduction in returns for private landlords. It also warns that the changes could contribute to a gradual increase in rents through two main routes.

1. Fewer rental properties becoming available

Lower returns could discourage new landlords from entering the market. Some existing landlords may also decide to sell their properties, reducing the number of homes available to rent.

The OBR considers a long-term increase in rents caused by this reduction in supply more likely than not.

2. Greater ability for remaining landlords to increase rents

If fewer landlords remain in the market, those who continue operating could have greater influence over rental prices. The OBR also suggests that remaining landlords may have more flexibility to increase rents over the longer term.

There is an important distinction between the two positions.

The Housing Minister is referring to the expected short-term effect on rental prices, while the OBR is warning about the potential consequences over several years. The OBR has not provided a new percentage forecast for the rent increase or suggested that rents will immediately rise by a specific amount in April 2027.

It is therefore possible for both arguments to be true: the immediate effect could be relatively small, while the longer-term impact on rental supply and affordability could be more significant.

The OBR also considers its estimate of the additional tax revenue highly uncertain. It expects the new measure to raise an average of £400 million per year from 2028-29. However, the forecast already accounts for more landlords moving their properties into limited companies and increased non-compliance, which are expected to reduce annual tax receipts by a combined £100 million.

What are the new property income tax rates?

Rental profits earned by individual landlords are currently taxed using the standard income tax bands.

However, from 6 April 2027, property income will have its own tax rates. These were initially announced in the 2025 Budget before being increased again in the October 2026 Budget.

The changes are expected to be included in the Finance Bill 2026-27. They are announced Government policy but have not yet become legislation.

These rates apply to individual and partnership landlords in England, Wales and Northern Ireland. Scotland is not included, as the UK Government has said it intends to give the Scottish and Welsh governments powers to set their own property income tax rates.

Limited company landlords are also excluded from the measure because the new rates apply to unincorporated landlords. Companies continue to pay corporation tax on their rental profits.

The existing income tax thresholds will remain unchanged:

• Personal allowance: £12,570.
• Higher-rate threshold: £50,271.
• Additional-rate threshold: £125,140.

How will the Section 24 tax credit change?

One important detail is that the mortgage interest tax credit under Section 24 will also increase from 20% to 24%.

HMRC has confirmed that finance cost relief will remain aligned with the basic property income tax rate. This means landlords will receive a higher credit against qualifying mortgage interest costs when the new rates take effect.

Although the headline tax rates are increasing by four percentage points, the higher mortgage interest credit helps offset some of the additional liability for landlords with borrowing.

Broadly speaking, the extra tax works out at around 4% of rental profit after mortgage interest, regardless of the landlord’s tax band, assuming the relevant relief is fully available.

However, the amount of additional rent needed to cover this increase will vary. Each extra pound of rental income will be taxed at the landlord’s applicable property income rate of 24%, 44% or 49%.

How much extra rent would landlords need to charge?

The amount landlords need to increase their rents will depend on their existing rental income, allowable expenses, mortgage interest and tax band.

For example, a landlord with a monthly rental income of £1,400, annual allowable costs of £3,000 and mortgage interest of £6,000 could face an additional tax bill of £312 per year if their rental profit falls entirely within the higher-rate band.

To recover that amount after tax, the landlord would need to increase rent by approximately £46.43 per month, equivalent to a 3.3% rise.

By comparison, a 0.2% increase in rent would only generate an additional £2.80 per month.

This illustrates why the market-wide figure quoted by the Housing Minister may not reflect the financial pressure experienced by individual landlords.

The calculation is for guidance only. It assumes the landlord’s rental profit falls within one tax band and uses the announced 2027-28 rates for England, Wales and Northern Ireland. It does not account for every restriction on mortgage interest relief, carried-forward finance costs or losses. Landlords should seek advice from an accountant before making decisions based on these figures.

Four examples of how the tax rise could affect landlords

The following examples compare the current tax rates with those due to take effect in April 2027. Each assumes that the landlord’s rental profit falls entirely within the relevant tax band.

Example B: A higher-rate landlord

Consider a landlord receiving £16,800 in annual rent, with £3,000 in allowable expenses and £6,000 in mortgage interest.

Their rental profit before mortgage interest is £13,800.

Under the current 40% tax rate, the tax on this amount is £5,520. After deducting the 20% mortgage interest credit of £1,200, the final tax liability is £4,320.

From April 2027, the 44% tax rate will produce a tax charge of £6,072. The mortgage interest credit will also increase to 24%, providing relief of £1,440.

This leaves a new tax bill of £4,632, which is £312 more than the landlord currently pays.

To recover the additional £312 after tax, the landlord would need to generate approximately £557 in additional annual rental income. This works out at £46.43 per month, or a 3.3% increase.

A 0.2% rent rise, by comparison, would only add £2.80 per month.

Example C: A landlord with a larger mortgage

The third example shows why mortgage borrowing can make a difference.

This landlord receives the same annual rent as Example B but pays £11,000 in mortgage interest instead of £6,000.

Because the higher Section 24 credit offsets more of the tax increase, their additional annual tax liability is only £112. They would need to increase rent by approximately £16.67 per month to cover the difference.

However, the landlord is already left with £520 less per year after mortgage interest and tax under the new arrangements. This demonstrates how landlords with higher borrowing costs may still feel considerable financial pressure.

Example D: An additional-rate landlord

The final example considers a landlord receiving £28,056 in annual rent, equivalent to £2,338 per month. This matches the ONS average private rent for London cited in the source figures.

After allowable expenses and mortgage interest, the landlord’s additional annual tax liability would be £442.

To cover this increase, they would need to raise rent by approximately £72.26 per month, representing a 3.1% increase.

These examples highlight why the same tax change can have different effects depending on a landlord’s finances.

It is also worth remembering that the OBR’s 0.2% figure refers to an estimated market-wide effect, not the rent increase required by an individual landlord to maintain their existing income.

Can landlords pass the additional tax costs on to tenants?

Although landlords may want to increase rents to cover higher tax bills, this does not mean they will automatically be able to do so.

There are three main factors to consider.

1. Rental market conditions

The latest rental figures suggest that the pace of rent increases has slowed compared with previous years.

ONS data shows that annual UK rent growth fell from 9% towards the end of 2024 to 3.3% in mid-2026, before increasing slightly to 3.8% in September 2026.

The latest figures also show differences between the nations:

• England: Annual rent growth of 4%, with average rent at £1,466 per month.
• Wales: Annual rent growth of 4.1%, with average rent at £848 per month.
• Scotland: Annual rent growth of just 0.7%, the lowest since the series began in 2016.

The UK average private rent reached £1,406 per month in September 2026, representing an annual increase of 3.8%.

These figures suggest that landlords will need to consider local market conditions before deciding whether a rent increase is realistic.

2. Rent increase rules in England

The Renters’ Rights Act has also changed how landlords can increase rent in England.

Under the new rules, landlords can generally increase rent only once every 12 months using the Section 13 procedure and Form 4A. Tenants must receive at least two months’ notice.

If a tenant believes the proposed rent is above the open-market rate, they can challenge it through the First-tier Tribunal.

Importantly, the tribunal considers the market rent for the property rather than the landlord’s individual costs. This means that higher mortgage payments, tax bills or other expenses do not automatically justify a rent increase.

3. Timing of the tax changes

The new property income tax rates are due to begin on 6 April 2027.

Because rent increases are restricted to once a year in England, landlords should review their tenancy dates and plan ahead.

Any proposed increase should reflect what similar properties are achieving locally rather than simply matching the additional tax bill.

Ultimately, the main concern raised by the OBR is not necessarily an immediate increase in rent. It is the possibility that lower returns will encourage landlords to leave the market, reducing the number of available rental homes over time.

Landlords whose properties are already let at market rates may find it difficult to pass on much of the additional cost in 2027.

What should landlords do before April 2027?

With the new tax rates approaching, landlords should review their finances and consider how the changes could affect their rental businesses.

Here are some practical steps to take:

1. Review your rental income and expenses

Use your latest tax return figures to calculate the rental income, allowable expenses and mortgage interest for each property. You should also look at your entire portfolio to understand the combined impact.

2. Check which tax band applies

If your rental profit falls across more than one tax band, different portions will be taxed at different rates. This is particularly important for landlords approaching the £50,271 higher-rate threshold. Ask your accountant to calculate the likely liability rather than assuming all your rental income will be taxed at one rate.

3. Compare your rents with local market rates

Research similar properties in your area to establish whether your current rents are below, in line with or above market levels. If there is room for a reasonable increase, follow the correct legal process. If your rents are already at market level, there may be little scope to pass on the additional tax.

4. Review tenancy rent dates

Make a note of when each tenancy can next have a rent increase. Consider the timing of the April 2027 changes and make sure you provide the required notice if you intend to propose an adjustment.

5. Check your operating costs

Before increasing rent, review whether you can reduce unnecessary expenses. Make sure you are claiming all allowable costs and check whether your mortgage rate remains competitive.

6. Get professional advice before changing ownership structures

The OBR expects some landlords to move their properties into limited companies in response to the tax changes.

However, transferring personally owned properties into a company can trigger Stamp Duty Land Tax and Capital Gains Tax. Landlords should seek professional tax and legal advice before considering this option.

7. Review Scottish properties separately

The announced property income tax rates do not apply to Scotland. Landlords with properties across different parts of the UK should make sure they understand the rules that apply to each location.

Frequently asked questions

Will rents increase because of the landlord tax changes?

The Housing Minister expects the immediate effect to be small, referring to a 0.2% rental impact from the previous tax increase. However, the OBR’s October 2026 report warns that the combined changes could lead to steadily rising rents over the longer term, mainly because fewer rental properties may be available. Neither has provided a firm estimate of the rental impact from April 2027.

What will the property income tax rates be from April 2027?

From 6 April 2027, the announced rates will be 24% for basic-rate taxpayers, 44% for higher-rate taxpayers and 49% for additional-rate taxpayers in England, Wales and Northern Ireland. The current rates are 20%, 40% and 45% respectively.

Will the Section 24 mortgage interest tax credit increase to 24%?

Yes. Under the announced policy, the mortgage interest finance cost credit will increase from 20% to 24% from April 2027. This is because the credit will remain aligned with the basic property income tax rate.

Does the property income tax increase apply to landlords in Scotland?

No. The announced rates cover England, Wales and Northern Ireland. The UK Government has said it intends to give the Scottish Government powers to set its own property income tax rates, so Scottish landlords should follow developments in the Scottish Budget.

Are limited company landlords affected?

No. The new property income tax rates apply to unincorporated landlords, including individuals and partnerships. Limited companies continue to pay corporation tax on their rental profits.

Can landlords increase rent to cover the additional tax?

In England, landlords can generally propose a rent increase once every 12 months using Form 4A, with at least two months’ notice. However, if a tenant challenges the increase, the tribunal will assess whether the proposed rent reflects the open-market rate. A landlord’s additional tax costs alone are not sufficient justification for a higher rent.

Final thoughts

The upcoming increase in property income tax will add another financial consideration for individual landlords, particularly those already dealing with higher mortgage costs and other running expenses.

While the Housing Minister expects the immediate effect on rents to be limited, the OBR’s warning about reduced rental supply raises longer-term concerns for both landlords and tenants.

Landlords should not assume they will be able to pass every additional cost on to tenants. Instead, reviewing their finances, understanding the new tax rules and keeping rents in line with local market conditions will be important as April 2027 approaches.

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