How Landlords Can Avoid 40% Tax On Rental Income 2026

Last updated 22 August 2026. Written against primary sources and reviewed as the rules change. Applies to England unless stated otherwise.

How Landlords Can Avoid Paying 40% Tax On Rental Income In 2026

Rising rents, frozen tax thresholds and a series of tax changes aimed squarely at the private rented sector mean more landlords than ever are being dragged into paying 40% tax on their rental income — often without realising it until the bill arrives.

The good news is that with careful planning, many landlords can legally reduce the amount of their income that falls into the higher-rate tax band. This guide explains exactly why landlords are increasingly being pushed into 40% tax, how the rules work in 2026, the legitimate strategies available to reduce your exposure, and the important changes coming in 2027 that every landlord needs to plan for now.

Important: this article provides general factual information, not personal tax advice. Tax depends entirely on your individual circumstances, and you should always consult a qualified accountant or tax adviser before making decisions.

Why Are More Landlords Paying 40% Tax?

Several factors have combined to push a growing number of landlords into the higher-rate tax band, even those who do not consider themselves wealthy.

Frozen tax thresholds
The point at which higher-rate tax begins — £50,270 — has been frozen and is set to remain frozen until 2030-31. As rents and incomes rise with inflation, more people are dragged over this threshold each year. This effect, often called fiscal drag or a stealth tax, means a growing number of landlords cross into the 40% band simply because the threshold has not moved with rising rents.

Rental profit stacks on top of other income
Rental profit is not taxed in isolation. It is added on top of your other taxable income — employment, pension, self-employment — to determine which tax band it falls into. A landlord earning £40,000 from a job with £15,000 of rental profit has a total taxable income of £55,000, pushing part of that rental profit into the 40% band.

Section 24 has inflated taxable profits
Perhaps the single biggest factor — and the least understood — is Section 24, which fundamentally changed how mortgage interest is treated. We will look at this in detail next, because it is the reason many landlords are paying higher-rate tax on profits they are not actually making.

What Is Section 24 And Why Does It Matter?

Section 24 of the Finance (No 2) Act 2015 is the most significant tax change to affect individual landlords in a generation — and understanding it is essential to understanding why so many landlords now pay 40% tax.

Before Section 24, landlords could deduct mortgage interest from their rental income as a business expense before calculating taxable profit, just like any other cost. Since April 2020, that is no longer possible. Instead, mortgage interest is no longer a deductible expense, and landlords receive a tax credit equal to 20% of their finance costs — always at the basic rate, regardless of their actual tax rate.

This creates two serious problems for landlords.

Problem one — inflated headline profit
Because mortgage interest is no longer deducted before calculating profit, the headline rental profit figure is much higher than the landlord’s real economic profit. This inflated figure is what gets added to your other income — and it can push you into the higher-rate band even though your actual profit is far lower.

Problem two — the relief gap
For basic-rate taxpayers, the change is broadly neutral — the old deduction gave 20% relief and the new credit also gives 20%. But for higher-rate taxpayers, the impact is severe. Under the old rules they received 40% relief on mortgage interest. Under the new rules they get only 20%. They are effectively taxed at 40% on income used to pay mortgage interest, but only get 20% back as a credit. That 20% gap is the additional cost Section 24 creates.

This is sometimes called the phantom profit problem — landlords being taxed on profit that does not reflect the real cash they have earned, because mortgage interest has been stripped out of the calculation.

A Simple Example Of How Section 24 Pushes Landlords Into Higher Rate Tax

Consider a landlord with a salaried job paying £40,000, who also receives £18,000 in rent and pays £10,000 in mortgage interest.

Under the old pre-2020 rules:

Rental income £18,000 minus £10,000 mortgage interest = £8,000 taxable rental profit
Total taxable income: £40,000 + £8,000 = £48,000 — below the higher-rate threshold
All income taxed at basic rate

Under Section 24 rules today:

Mortgage interest is no longer deducted, so taxable rental profit is the full £18,000
Total taxable income: £40,000 + £18,000 = £58,000 — now over the £50,270 higher-rate threshold
Part of the rental income is now taxed at 40%, with only a 20% credit on the mortgage interest

The landlord’s actual economic profit has not changed — but Section 24 has pushed them into the higher-rate band and increased their tax bill. This is exactly why understanding the rules matters so much.

How Can Landlords Legally Reduce Their Higher Rate Tax?

There are several legitimate strategies landlords use to reduce the amount of income falling into the 40% band. The right combination depends entirely on individual circumstances, which is why professional advice is essential. The strategies below are explained for general information.

1. Pension Contributions

Pension contributions are one of the most effective and widely used ways to reduce higher-rate tax exposure.

The mechanism works through something called adjusted net income. Your rental profit forms part of your adjusted net income, and pension contributions are deductible when calculating it. By making a pension contribution, you reduce your adjusted net income — which can bring you back below the £50,270 higher-rate threshold.

The government pays tax relief on money saved into a personal or workplace pension, up to an annual allowance of £60,000 for most people, as long as the contribution does not exceed your earnings. By contributing the portion of your income that exceeds the threshold, you can potentially keep your taxable income within the basic-rate band.

There is an additional benefit for higher earners. For those whose adjusted net income falls between £100,000 and £125,140, the personal allowance is tapered away — reduced by £1 for every £2 of income over £100,000 — creating an effective tax rate of 60% on income in that band. A pension contribution that brings adjusted net income back below £100,000 can restore the personal allowance, producing an effective rate of relief of 60%. For landlords whose rental profit tips them into this band, this is particularly valuable.

There is also a carry-forward rule that allows you to use unused pension allowance from the previous three tax years, potentially allowing larger contributions. The rules here are complex and getting them wrong can be costly, so this is very much an area for professional advice.

2. Claiming All Allowable Expenses

While mortgage interest is no longer deductible, many other costs still are. Landlords should ensure they are claiming every allowable expense to reduce their taxable rental profit, including:

Letting agent and management fees
Repairs and maintenance (but not improvements)
Landlord insurance premiums
Ground rent and service charges
Council tax and utility bills paid by the landlord
Accountant’s fees
Costs of advertising for tenants
Direct costs such as phone calls, stationery and travel relating to the rental business

Claiming all legitimate expenses reduces the taxable profit figure that gets added to your other income — which in turn reduces the amount potentially falling into the higher-rate band. Keeping thorough records is essential, particularly with Making Tax Digital for Income Tax now applying to many landlords.

3. Sharing Ownership With A Spouse Or Civil Partner

For married couples and civil partners, how a property is owned can make a significant difference to the overall tax bill.

If one partner is a basic-rate taxpayer or a non-taxpayer, holding a larger share of the rental property in their name can mean more of the rental profit is taxed at lower rates rather than at 40%. Transfers of assets between spouses and civil partners are generally exempt from capital gains tax, which can make this kind of reorganisation more straightforward — though the arrangements must be set up correctly and reflect genuine beneficial ownership.

The rules around how rental income is split between spouses, and the forms required to reflect unequal ownership, are technical. This is an area where getting professional advice before acting is particularly important.

4. Using Your ISA Allowance

All forms of income contribute to your total taxable income and therefore to which band your rental profit falls into — including savings interest and dividends.

By holding savings and investments within an ISA, the interest and returns are tax-free and do not count towards your total taxable income. Each adult has an ISA allowance of £20,000 per year. For a landlord close to the higher-rate threshold, ensuring savings interest and investment income are sheltered within ISAs can help prevent that income from tipping them over into the 40% band.

5. Charitable Giving Through Gift Aid

Donating to charity through Gift Aid can extend your basic-rate tax band. When you make a Gift Aid donation, your basic-rate threshold is effectively increased by the grossed-up amount of the donation. This means more of your income is taxed at the basic rate rather than the higher rate, while also benefiting a good cause. Higher-rate taxpayers can claim back the difference between the basic and higher rates through their self-assessment return.

6. Considering A Limited Company Structure

One of the most significant decisions landlords face is whether to hold property personally or through a limited company.

Limited companies are not subject to Section 24 — company-owned rental properties can still deduct mortgage interest fully against rental income before calculating taxable profit. For some landlords, particularly those with larger or highly geared portfolios, incorporating can offer significant tax advantages.

However, incorporation is not a simple fix and brings major considerations of its own, including potential stamp duty on transferring properties, capital gains tax on disposal, mortgage availability and cost, corporation tax, and the administrative burden of running a company. Whether incorporation makes sense depends entirely on individual circumstances, and it is essential to take specialist advice before going down this route.

The Big Change Coming In 2027 — New Property Income Tax Rates

Every landlord needs to be aware of a major change announced in the November 2025 Budget and now passed into law: from 6 April 2027, rental profits will be taxed at new, separate property income tax rates that are higher than the rates on employment income.

The new property income tax rates will be:

Property basic rate: 22% (compared with 20% on employment income)
Property higher rate: 42% (compared with 40%)
Property additional rate: 47% (compared with 45%)

In other words, every band is two percentage points higher than the equivalent rate on earned income. The government’s stated reasoning is that landlords do not pay National Insurance on rental income, while employees and the self-employed do, so the higher rates are intended to bring the overall tax burden on rental profit closer to that on earned income.

Around 2.4 million landlords are expected to pay more tax as a result. These rates apply to individual landlords in England and Northern Ireland, with Scotland and Wales to be given the ability to set their own property income rates.

There is one small offset. Currently, higher and additional-rate landlords receive their Section 24 mortgage interest relief at the basic rate of 20%. From 2027, that relief rate rises to 22%, in line with the new property basic rate — a modest consolation against the higher headline rates.

Another 2027 Change — The Order Allowances Are Applied

A further technical change arriving from 2027-28 is the way allowances and reliefs are applied. Under the new rules, general allowances and reliefs will be set against other income first — such as employment or pension income — before being applied to property, savings or dividend income.

This matters because if your salary or pension already uses up your personal allowance, your entire rental profit could be taxable at the new property rates with nothing to shelter it. For landlords with mixed income, this reinforces the importance of reviewing your overall tax position well before 2027.

What About Making Tax Digital?

Landlords also need to factor in Making Tax Digital for Income Tax, which is being phased in from April 2026.

From 6 April 2026, landlords and self-employed individuals with qualifying income over £50,000 must keep digital records and submit quarterly updates to HMRC, with the first quarterly update due by 7 August 2026. The threshold then steps down to £30,000 from April 2027 and £20,000 from April 2028, eventually bringing the majority of landlords within the system.

While Making Tax Digital does not directly change how much tax you pay, it changes how you report — and good digital record-keeping makes it far easier to ensure you are claiming all allowable expenses and managing your tax position effectively.

Why Professional Advice Is Essential

Tax planning for landlords has become genuinely complex. The interaction between Section 24, the new 2027 property tax rates, pension contributions, adjusted net income, allowance tapering and ownership structures means there is no one-size-fits-all answer.

A strategy that works brilliantly for one landlord could be inappropriate or even costly for another. The figures and mechanisms described in this article are general information — applying them to your own situation requires personalised advice from a qualified accountant or tax adviser who can look at your full financial picture.

The cost of good tax advice is almost always small compared to the tax it can save — or the costly mistakes it can prevent. Given the scale of the changes coming in 2027, now is a particularly sensible time for landlords to review their position professionally.

GOV.UK Guidance

Landlords can find official guidance on tax when renting out property here: GOV.UK Renting Out A Property — Paying Tax

Frequently Asked Questions

At what income do landlords start paying 40% tax?

Higher-rate tax of 40% applies to taxable income above £50,270 in 2026-27. Rental profit is added on top of your other income, so it is your combined total that determines whether you cross this threshold. This threshold is frozen until 2030-31.

Why is my rental profit higher than the cash I actually make?

Because of Section 24, mortgage interest is no longer deducted as an expense before calculating taxable rental profit. Instead you receive a 20% tax credit. This means your taxable profit figure can be much higher than your real economic profit, particularly if you have a large mortgage.

Can pension contributions reduce my higher-rate tax as a landlord?

Yes. Pension contributions reduce your adjusted net income, which includes your rental profit. Contributing the amount of income that exceeds £50,270 can potentially bring you back into the basic-rate band. The rules are complex, so professional advice is essential.

What are the new property income tax rates coming in 2027?

From 6 April 2027, rental profits will be taxed at separate property income rates of 22% (basic), 42% (higher) and 47% (additional) — two percentage points above the equivalent rates on employment income. Around 2.4 million landlords are expected to pay more as a result.

Does putting property in a limited company avoid Section 24?

Limited companies are not subject to Section 24 and can deduct mortgage interest fully. However, incorporation brings significant other costs and considerations including potential stamp duty, capital gains tax and corporation tax, so specialist advice is essential before incorporating.

Can I split rental income with my spouse to reduce tax?

For married couples and civil partners, holding more of a property in the name of a lower-earning partner can mean more rental profit is taxed at lower rates. Transfers between spouses are generally exempt from capital gains tax, but the arrangements must be set up correctly, so take advice first.

Does rental income count towards the £100,000 personal allowance taper?

Yes. Rental profit forms part of your adjusted net income, which is used to determine personal allowance tapering above £100,000. Landlords whose income falls between £100,000 and £125,140 face an effective 60% tax rate as the allowance is withdrawn, which pension contributions can help address.

Will I have to report my rental income quarterly?

From April 2026, landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates under Making Tax Digital for Income Tax. The threshold reduces to £30,000 in 2027 and £20,000 in 2028.

Is mortgage interest relief changing in 2027?

The Section 24 relief rate rises from 20% to 22% from April 2027, in line with the new property basic rate. This is a small offset against the higher headline property tax rates being introduced at the same time.

Should I get professional tax advice?

Yes. Landlord tax has become highly complex, and the right strategy depends entirely on your individual circumstances. A qualified accountant or tax adviser can review your full position and recommend the most appropriate approach, particularly ahead of the 2027 changes.

Final Thoughts

More landlords are being pushed into paying 40% tax than ever before — driven by frozen thresholds, the way rental profit stacks on top of other income, and above all the effect of Section 24 inflating taxable profits. And with new, higher property income tax rates arriving in April 2027, the pressure on landlords’ tax bills is only set to increase.

The key points to take away are:

Section 24 means mortgage interest is no longer deducted before tax, inflating taxable profit and pushing many landlords into the higher-rate band
Rental profit is added on top of your other income to determine your tax band
Pension contributions are one of the most effective ways to reduce adjusted net income and stay below the higher-rate threshold
Claiming all allowable expenses, using ISAs, spousal ownership and Gift Aid can all help manage your exposure
From April 2027, separate property tax rates of 22%, 42% and 47% will apply — two points above employment income
The changes are complex and interact in ways that make professional advice essential

The single most important step any landlord can take is to understand their own position clearly and seek qualified professional advice — particularly with the significant changes arriving in 2027. Planning ahead now, rather than reacting when the tax bill arrives, is what separates landlords who manage their tax efficiently from those who pay more than they need to.

This article is for general information only and does not constitute personal tax or financial advice. Tax treatment depends on individual circumstances and may change. Always consult a qualified accountant or tax adviser before making decisions about your tax affairs.

How Landlords Can Avoid Paying 40% Tax On Rental Income In 2026